加载中...
共找到 37,966 条相关资讯
Operator: Good day and welcome to Flywire's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the call over to Masha Kahn, Investor Relations. Please go ahead. Maria Kahn: Thank you, and good afternoon. With us today are Mike Massaro, Chief Executive Officer; Rob Orgel, President and Chief Operating Officer; and Cosmin Pitigoi, Chief Financial Officer. Our first quarter 2026 earnings press release, supplemental presentation and when filed, Form 10-Q are available at ir.flywire.com. Today's call is being recorded and will be available for replay on our website. During the call, we'll be discussing certain forward-looking information. Actual results could differ materially from those contemplated by these statements. In addition, unless otherwise indicated, all financial measures discussed on this conference call are non-GAAP financial measures. Please refer to our press release and SEC filings for more information on the risks related to forward-looking statements and the required reconciliations of non-GAAP financial measures. With that, I'll turn the call over to Mike. Michael Massaro: Thank you, Masha, and thanks to everyone for joining us here today. It was a great quarter with significant growth and a beat on both the top and bottom line, with broad-based outperformance across education, travel, healthcare and B2B. We are building for scale while driving efficiencies into our operations. Our product and tech organization continues to generate high-quality, high-value, differentiated products and services. And our go-to-market teams continue to sign meaningful enterprise deals, while also landing and expanding across our global client base. We are executing against our multiyear strategy to deliver $1 billion in revenue with impressive financial metrics, and I want to spend a moment on why those metrics keep improving. We go where others are unable or unwilling to go. Most companies are built for simplicity, ours is built for complexity. Multicurrency, multi-method, multi-rail, deeply integrated, sector-specific payments and software at scale. This is what Flywire is built for. Every new payment method, every new regulatory layer, every new integration only strengthens our differentiated position. The harder the workflow, the fewer companies can follow, and that is exactly where we specialize. This is what defines our moat. We have proven the thesis and the execution continues to improve. We are signing larger clients, growing volumes and product attach rates within existing relationships. Our momentum is yet another proof point. When clients stay, expand and refer others to Flywire, the market is telling you clearly our model works. And the total addressable market continues to expand. 3 years ago, Flywire is primarily a cross-border payments provider. Today, we serve the full suite of domestic and international payment flows across major geographies. And in education alone, that expansion has grown our addressable market, roughly tenfold. Many of our existing clients are still cross-border only, moving them towards processing 100% of their payment volume through Flywire is a growth engine that lives within our installed base, independent of macro conditions. Let me walk you through 4 priorities, each designed to build long-term value. First, optimizing and strengthening the core platform. The most important thing to understand about our platform is that it gets more efficient as it scales. As payment volume grows, our routing intelligence improves, banking relationships deepen, cost per transaction declines. This is not static infrastructure. It is a network that becomes more valuable with every new corridor, every new client, and every new additional dollar of volume we process. To put that in concrete terms, our payment platform today moves well over $30 billion per year, adds value to clients in more than 50 countries and accepts payments from 240 countries and territories. That scale funds better banking relationships, better routing economics and better localized experiences than a smaller platform can replicate. More volume improves the network, a better network attracts more clients, more clients deepen the integrations and deeper integrations make us harder to displace. And every capability we build, whether in education, travel, B2B or healthcare, becomes part of our shared platform designed to compound across every vertical. Our second priority is accelerating our revenue flywheel. We are seeing clear acceleration across our go-to-market motion. We are seeing bigger deals, more enterprise wins and time to signature is decreasing. Across every vertical, clients get more. More conversion, more AR visibility, more staff time on high-value work and less of everything that slows them down. Fewer payment failures, less reconciliation burden, less bad debt, less inbound questions. That ROI is what drives retention and retention drives expansion. Our land and expand strategy drives gross profit growth and paired with very low revenue churn across education and travel, it reflects a platform that once adopted, becomes foundational infrastructure for our clients. Our third priority is innovating to deepen our ownership of critical workflows. What keeps clients with us is not just the payment, it is everything Flywire does around it, the software, the workflow, the visibility, the operational efficiency. We are continuously expanding our software platform to reduce operational burden and strengthen revenue management for our clients. This quarter in education alone, we enhanced our solution capabilities to better automate student communications, improve due date visibility and scaled our U.S. loan disbursements for U.K. institutions. Similar innovation is happening across every vertical, in healthcare, travel, B2B, we are removing the complex workflows that our clients have managed manually for years. Clients trust Flywire with their most critical workflows and look to us to deliver new products, features, and payment methods. One of our key moats is the network of integrations, compliance infrastructure and operational connections around the transactions, embedded into ERP systems, bank networks and systems of record in ways that are genuinely hard to displace. As payment complexity increases, our relevance grows because clients do not want to solve orchestration, reconciliation and compliance themselves, they want a trusted platform that absorbs that and streamlines operations for them. That is exactly what Flywire does. And our fourth and last priority, AI is an enabler for Flywire, not a threat. AI increases the value of whoever owns the workflow and the data. At Flywire, we own both. Generic AI solutions do not have our transactional data across education, healthcare, travel and B2B. They cannot replicate our deep ERP integrations and our regulatory licensing or the years of client-specific behavior data that underpin what we do. So as AI becomes more powerful as a category, we believe our position becomes more valuable to our clients, not less. We are also already seeing internal AI benefits emerge in our cost structure, and the opportunity ahead is significant. We've seen approximately 40% of customer inquiries auto-resolved without human intervention, with 30% reduction in support handling time and cost per contact. We are also seeing faster onboarding, thanks to AI-assisted implementations and increased throughput without a linear increase to head count. Across the business, the impact is broad. Engineering teams shipping code faster, product teams innovating more quickly and incorporating client feedback more rapidly. And a finance team automating routine analysis so they can focus on higher judgment work. These improvements are already happening even while we continue our enterprise-wide digital transformation. Rearchitecting not just our underlying operating systems and data, but also our organization, processes, and ways of working end to end with an agentic AI future in mind. The winners in an AI-driven world will be platforms that own the workflow, the data and the client relationships, delivering results and doing so more efficiently than ever. That is the future of Flywire. So let me leave you with what defines Flywire. We run toward complexity. We operate a network of global and local payment methods, coupled with regulatory expertise all around the world. We manage the deep software integrations that most payment companies cannot build and most software companies cannot operate. We have built the capability, the team and the infrastructure to go exactly where others cannot or will not follow. We focus on underserved large industries, education, travel, healthcare and B2B, which have massive addressable markets with long-term structural growth tailwinds. These are not cyclical bets. They are durable expanding opportunities and Flywire is built to capture them at scale. And we deliver innovative technology paired with exceptional client service, removing complexity for our clients so they can focus on their mission while fundamentally improving how they get paid. Flywire is uniquely positioned to do this, our industry-leading software, our global payments platform and our FlyMates, genuine experts in the industries we serve, who execute every day to deliver real outcomes for our clients. That combination is rare. It is hard to replicate. It is what gives us confidence in where Flywire is headed. Rob will now take you through the further evidence of what I've described, the wins, the go-lives and the client outcomes that are compounding into durable growth. Rob? Rob Orgel: Thanks, Mike. The pattern across our business is consistent. We go where payment workflows are fragmented and operationally intensive. We embed deeply and we expand as clients consolidate more of their financial operations onto our platform. Let me walk you through 3 themes that define Q1: strategic vendor consolidation of these workflows, geographic diversification beyond traditional markets and accelerated software-led monetization across travel, B2B and beyond. Let me start with vendor consolidation. Clients are choosing to consolidate fragmented financial workflows onto a single trusted platform. We are leveraging this dynamic across our verticals and the reason we win is that we are the only platform that can handle all the complex workflows they need. As an example, Cornell University has committed to a long-term agreement for our full student financial software suite. Cornell is a large institution, tens of thousands of students, significant international enrollment, multiple funding sources, including sponsor billing and loan disbursements and a collections operation that touches separate debt types simultaneously. They are consolidating their billing, payments, payment plans, refunds and collection processes onto a unified global platform that only Flywire can provide. This reduces the complexity and cost of managing multiple fragmented vendors while giving Cornell a simpler, more automated and uniform view of their student financial activity. In the U.K., our SFS is delivering measurable results at institutions facing similar operational challenges. Kingston University reduced manual financial suspensions by over 30% this quarter through automated workflow management. We signed 3 additional U.K. SFS clients this quarter, all attracted by our ability to manage their unique operational needs. Separately, The University of Edinburgh, one of our largest U.K. cross-border clients, achieved approximately GBP 1 million in savings in under a year by consolidating their international tuition flows and doing reconciliation via our platform. In healthcare, we expanded with Endeavor Health, where we are now managing their pre-service, point of service, and post-service patient payments, deeply integrated with Epic across this multisystem organization. Endeavor operates across multiple hospitals and care sites, each with its own billing environment and requiring us to support a high degree of specialized workflows. Our certified integrations with Epic, Cerner and Oracle, combined with our regulatorily compliant vertical software workflows are barriers that keep most payment providers out of this market. The second thing we are seeing clearly reaffirmed in 2026 is the demand for our solutions is truly global. Using education as an example, our solutions are proving themselves outside of our traditional big 4 markets, being the U.S., the U.K., Canada and Australia. Education revenue outside those markets grew over 40% year-over-year in Q1 and more than 60% of new education clients signed were from outside the Big 4. In Europe, we are seeing momentum in Germany, Spain, Italy and other markets as international students continue to diversify destination markets. These are not simple markets to operate in. Each requires navigating local requirements, including integrations, translations, reconciliation requirements and payments infrastructure. Institutions need a platform that can absorb that layered complexity and that is what we provide. In Asia, we are seeing the same strong demand. This quarter, we went live with a top global university in Singapore and now have the majority of the country's universities using Flywire. Singaporean institutions are managing multiple currencies, regional payment rails and local compliance requirements on top of international tuition flows. Having the majority of this market using our platform also creates compounding network effects, that shared corridor economics, deeper regional banking relationships and routing intelligence that improves with every additional dollar of volume we process there. We see lots of needs in Singapore and many other markets that are addressed by our software capabilities. Wrapping up my comments on why we win in global education. In Canada, where the broader market remains under pressure, our revenue has turned positive as we continue to expand our installed base and win competitive RFPs. This quarter, for example, we started processing payments for University of Calgary, a major Canadian University with over 30,000 students, and we see continued opportunity to take share in that market. Finally, our software-led approach has been a key catalyst for capturing and monetizing payment volume. In travel, our hospitality solutions, formerly branded, Sertifi, are continuing to grow well. Payment attachment is increasing and more volume is routing through Flywire as we replace legacy gateway processors with our solution. The complexity these clients face is specific to high-value hospitality, contracts involving multiple signatories, card-not-present fraud prevention, multicurrency deposits, refund and charge-back management across jurisdictions and reconciliation against property management systems. All workflows a generic payment gateway was never designed to handle. Unlike a gateway, we sit inside the contract workflow itself. Our sign and pay capability collapses the contract and payment into one moment. The client signs, the payment is captured, the booking is confirmed. For operators running high-value cross-border transactions, that reduces charge-back exposure at the point of transaction. A level of workflow ownership no generalist processor can replicate. We estimate there is still an additional $2.5 billion of payment volume within our existing U.S. hospitality clients alone that we can capture. And we are investing also in an international rollout this year as we see the same fragmented workflows exist in other major travel and hospitality markets. In luxury and experiential travel, Q1 was our second largest quarter for ARR signings with 15 deals over $100,000. Carr Golf and Travelling The Fairways, both left large horizontal processors for Flywire, drawn by operational efficiencies and the ability to replace a separate invoicing tool with a single workflow. The reason we win in luxury travel has not changed, competitive rates, automated reconciliation and a level of service generalist processors cannot match. Software-led monetization is also working well in our B2B business. Studycast, a cloud-based imaging workflow platform for healthcare came to us with unique invoicing scenarios across multiple markets. They were seeking to improve low cash flow visibility and improve an entirely manual AR process. We are giving them invoicing, payments and global settlement in one workflow, that means automated reconciliation, faster collections and better working capital visibility. CMC and Lula Life, 2 other clients that went live this quarter, are variations of the same story. Complex billing and operations that are perfectly suited for Flywire. Across every vertical, the logic is the same. We go where others are unwilling or unable to go. We embed deeply and our platform becomes critical infrastructure once deployed. Cosmin will show you what it looks like in the numbers. And with that, I'll turn it over to Cosmin. Cosmin Pitigoi: Thanks, Rob. I'll detail our financial performance for Q1 2026, discuss our margin dynamics and provide our updated full year outlook. Q1 performance strength was broad-based and results exceeded expectations. Total revenue reached $184 million, up 43% on a spot basis and 37% FX-neutral growth, including 7 points in organic contribution from Sertifi. Almost half of the 9-point outperformance versus the midpoint on an FX-neutral basis was driven by a strong January education peak in some of our core markets, with the remaining beat coming from strength in our travel segment, specifically hospitality, in particular, Sertifi payments. In addition, we continued seeing stronger-than-expected payment processing volumes from Cleveland Clinic and invoice migration, which had approximately a mid-single-digit tailwind in Q1 and expect to be of similar magnitude in Q2. Transaction revenue was $155 million, up 43% year-over-year. This was driven by a 45% growth in transaction payment volume with continued contribution from education, both cross-border and domestic as well as travel. As a reminder, quarter-to-quarter blended yields can vary with mix, especially as domestic payments ramp up. Higher domestic volumes and greater credit card penetration carry different economics than cross-border flows. On a like-for-like basis, pricing remains stable and competitive behavior continues to be disciplined. Our spreads reflect the value we deliver, compliance, reconciliation, ERP integrations and enterprise-grade infrastructure, not commodity payment processing. Platform and other revenues were $29 million, up 40% year-over-year, primarily driven by growth in hospitality. Adjusted gross profit reached $110.5 million increasing 34% year-over-year at spot, including 3 tailwinds. Approximately 8 points inorganic contribution from Sertifi, a mid-single-digit points from FX translation and a high single-digit benefit from stronger education performance in January. Importantly, this 34% gross profit dollar growth is successfully converting into adjusted EBITDA margin expansion, demonstrating real operating leverage. Adjusted EBITDA was $39 million, resulting in a 21.4% margin expanding at 452 bps year-over-year, which was above the upper end of our guide. The strength in adjusted EBITDA reflects gross profit growth and continued operating leverage across every expense category as our non-GAAP operating expenses grew at a meaningfully slower rate than gross profit. Our adjusted gross margin of 60.1% was down by approximately 400 basis points. Margin dynamics are driven by 3 factors: mix, FX and temporary large payment processing ramps, not competitive pressure. This quarter, the margin change was primarily driven by approximately 250 basis points from the mixed contribution of higher Cleveland Clinic and B2B invoice client payment revenues that began ramping in the second half of 2025. The balance of the margin change was due to continued vertical mix shifts. FX on settlement impact in Q1 was minimal on an absolute basis. But we did benefit from a favorable year-over-year comparison given the headwind we experienced in Q1 2025. Excluding the ramp activity, gross margin dynamics would be within our expected range. We emphasize that these ramp dynamics are temporary and will be largely complete by the end of 2026. In Q1, we delivered GAAP net income of more than $12 million. It is a direct result of the operating leverage we have been building into this business, and we remain on track to grow GAAP net income by approximately 3 to 4x on a full year basis. Turning to capital allocation. Our balance sheet remains strong with approximately $215 million in corporate cash, giving us significant financial flexibility while continuing to invest in the business. Today, we're announcing an accelerated share repurchase program of up to $50 million under our existing share repurchase authorization, the single largest capital return action in Flywire's history as a public company. The ASR program reflects our conviction in the intrinsic value of the business and our view that the current share price represents a compelling opportunity. This is not a change in our growth investment philosophy. We're acting on market dislocation. The company intends to fund the ASR with available cash on hand. The ultimate amount and timing of repurchases will be informed by prevailing market conditions and price levels ensuring alignment with our return thresholds and broader capital allocation priorities, including continued investment in organic growth and selective M&A. Since launching the repurchase program, we have now deployed $128 million in total share buybacks, which represents the majority of free cash flow over that time period. A track record of consistent execution, not episodic activity. Moving to guidance. We are raising both revenue and EBITDA guidance for the full year 2026. We now expect 18% to 24% FX-neutral revenue growth with approximately 3 to 4 points from payment processing ramps in B2B and healthcare, mostly benefiting the first half of the year. And roughly 1.5 points of inorganic contribution as we lap Sertifi. Adjusted gross profit is expected to grow just above the mid-teens year-over-year at spot. We expect approximately 175 to 375 basis points of full year EBITDA margin expansion, reaching approximately 22.8% at the midpoint. Stock-based compensation remains targeted at approximately 10% of revenue, while we continue managing growth and net dilution in a disciplined manner. And anticipates free cash flow conversion of 70% to 75% of adjusted EBITDA. Our Q1 outperformance flows through to upgraded full year 2026 guidance. Before I walk through the details, I want to flag one shaping dynamic. Second half revenue growth is expected to decelerate relative to the first half, not because of any change in the underlying business, but because we are anniversarying the Cleveland Clinic and invoice payment volume ramps from the second half of 2025. Gross profit growth is less affected given the margin profile of that revenue. On macro, we are not changing our underlying assumptions. While Q1 benefited from a strong January education peak and favorable timing that we view as nonrecurring, we continue to expect performance to normalize over the remainder of the year as we remain prudent and data dependent. For Q2 2026, we expect FX-neutral revenue growth of 18% to 24%. As we indicated last quarter, growth will moderate from Q1 as Sertifi laps out. But underlying organic momentum remains solid. At current spot rates, we anticipate 1 point of FX tailwinds. Gross profit dollar growth is expected in the mid-teens range at spot rate including low single-digit estimated benefit from FX on settlement year-over-year dynamics. Adjusted EBITDA margin is expected to expand by approximately 75 basis points year-over-year at the midpoint of our guidance. Following a very strong Q1 margin expansion, the Q2 expansion is modestly below our typical annual expansion rate, reflecting 2 dynamics. First, we're lapping the restructuring actions we took the first quarter of 2025, which created a more favorable cost base than the prior year period in Q2. And second, we're making deliberate investments in domestic expansion growth, data and AI infrastructure alongside scaling Sertifi beyond the historically U.S.-focused business into a global platform as part of our broader hospitality strategy, all high conviction long-term priorities. Note that Q2 is our seasonally lowest revenue and EBITDA quarter with margin expansion weighted to the back half of the year as revenue scales seasonally. In closing, Q1 demonstrates the durability of our diversified platform, the scalability of our operating model and our continued commitment to disciplined capital allocation. As Mike described, we are actively embedding AI and automation across our operations. We structured AI governance at the executive level to accelerate adoption and rigor. Having spent 2 decades believing in the power of data architecture and machine learning to empower people, today, that conviction is being supercharged by AI agents that are profoundly enhancing our human capabilities across the business. One of the core principles of the enterprise-wide digital transformation program is the concept of democratizing certified data, making accurate structured data available to everyone across the organization, both our people and AI agents working side by side. We are actively investing in the capabilities our teams need to thrive in an AI-augmented environment, and we are being equally deliberate about aligning our organizational structure. The goal is an organization that is faster, more scalable and structurally better suited to the next phase of Flywire's growth. We're redesigning how work gets done from the ground up, not layering new tools on to old workflows. This is the hardest part of any transformation and where the greatest long-term efficiency and scalability gains will be realized. In sales and marketing, this will enable us to match the right product to the right client with greater precision and less resource strain and our sales reps to become even more productive with more revenue per rep and shorter sales cycles. In R&D and product, it enables us to iterate and innovate faster for our clients. And in G&A, we see the longest runway ahead. We're rearchitecting these functions from the ground up to be agent-ready and we expect the productivity gains to be meaningful as that infrastructure matures. As gross profit continues to grow faster than OpEx over time, the operating leverage is driving our EBITDA margin expansion, and we expect to continue as growth and profitability reinforce each other. By normalizing our foundation, embedding AI natively and rearchitecting our systems and how we operate, we are structurally lowering the cost of scale while expanding our capacity to grow. Q1 is evidence. The model is already working, and our digital transformation is how we make it more durable at scale. I'll now turn it back to the operator for questions. Operator? Operator: [Operator Instructions] Our first question comes from Ken Suchoski with Autonomous Research. Kenneth Suchoski: Really good results here. I just wanted to dig into the success in the non-Big 4 education markets. I think I heard 40% revenue growth, 60% of new clients coming from these markets. So are these just less penetrated? Are you taking more share? Or maybe it's a smaller base, but any additional detail there would be great. Rob Orgel: Ken, it's Rob here, and I'm happy to take this one. You're right, we called out the success in the non-Big 4 markets. And really, it's the product of our strategy and our capabilities combined with a lot of market opportunity out there. So if you think about what we can bring to those markets, right, it's the distinctive software capabilities, all of the global payment network, the solution tailored for the industry. And in those markets, they don't tend to have somebody who looks like us can do the kinds of things we do. And so take that, combine it with a team that's local, a customer service capability that's local and suits them, and we really have a distinctively strong capability. I'd remind you that for even more of those places, we've expanded this capability. It's not just cross-border, it's domestic plus cross-border in a lot of the major markets. And so it's a set of markets that we're really excited about, especially as students overall diversify their destinations. Kenneth Suchoski: Okay. Great. That's really helpful. And then maybe just on Sertifi, I think you talked about scaling that business sort of outside the U.S. and taking that global. Maybe just give us an update there. What are the actions you're taking? I mean, which markets you're looking to prioritize and what the road map is there. Michael Massaro: Ken, this is Mike. So on the hospitality business, I mean, I think the synergies still are very clear as they were at the time of deal, right, which is monetize more payment volume that sits next to the hospitality software that Sertifi had and prepare the platform and take it global to hospitality clients all over the world. And so that second one is on track. A lot of great work done by the tech teams to kind of integrate travel capabilities from the core Flywire travel business as well as the hospitality side. And that team is being built out and super excited to continue that international expansion. Specifically, probably think of us as going to Europe, it's a big area for us, obviously, with our existing travel business in Southeast Asia, in particular, being our kind of 2 geographies that we'd expect most of that growth to be coming from in the short term, but it is a multiyear strategy. Operator: Our next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Great results. Thinking about the second quarter margin variance, I know you talked about there a little bit, but I'm just curious, is that mostly discretionary on your part from an investing standpoint? What would drive you to go ahead and invest more? I'm sure that would translate into a pretty fast return if you did that. So I'm just trying to better understand the puts and takes around where you might land and what would drive that? Cosmin Pitigoi: Yes. Thanks, Tien-Tsin. This is Cosmin. So following a very strong Q1, even in Q2, we were investing obviously modestly around some of the high conviction areas that we've seen. But as you've seen us for the rest of the year, we're expecting to see margins expand even more so and raise the full year outlook. And so feel good about the investments and the return of those. And so -- and plus, I would remind you just from last year, we're lapping some of those one-offs. But in general, Q2 is pretty small. So on a very small base, overall, as you saw in my prepared remarks, in terms of the EBITDA number there. Tien-Tsin Huang: Got it. No, that makes sense. And then Mike and Rob, you both talked about enterprise wins and competing for larger deals. I know you're comping out Cleveland Clinic. Just in general, do you feel like there's some, I don't want to call them gorillas, but just larger deals like that in the pipeline that you're seeing, maybe that's a little bit different than maybe this time last year. Rob Orgel: So we're overall really pleased with the quality of pipeline growth. We're pleased with the size of deals. We called out the deal size growth here in Q1. Want to be careful making reference to clients like Cleveland Clinic and so on, like that's obviously -- I know exactly what animal you just referenced, but it's a very, very big animal. And so we don't sort of call that out as being the norm. But overall, we're very happy with the quality of pipeline, and we're pursuing a lot of great accounts. Operator: Our next question comes from Dan Perlin with RBC Capital Markets. Daniel Perlin: Again, great results. Mike, I just want to go back to the original topics you're going to run through and the one that kind of stood out again is kind of vendor consolidation becoming more of a, I think, a consistent theme. I think you always thought that was going to be kind of the case, but it does feel like it's picked up some, I guess, velocity here over the past several quarters. And I'm wondering, is that a function of your go-to-market motion? Is it like the density in market and people are increasingly recognizing your capabilities, I guess, holistically. I'm just trying to get a sense of where that might help in itself going forward. Michael Massaro: Sure, Dan. Yes. I think it's a combination of things, I think, obviously, we sit in an area where we're dealing with lots of complexity. We're offloading that for our customers. And when you do that, they trust you to do more. And so I would say the more problems we solve, the more they come to us looking for other opportunities to leverage Flywire technology. I think that's probably the first one. The other thing I would just say is in this age of AI, right, a lot of people talk about kind of disruption from AI, but like if you innovate, if you deliver value, leveraging this technology, customers see that value. They want to work with you more. And I think for us, our teams are moving faster. They're delivering better results. They're delivering great client experiences. When their payers have challenges, we're there to help. And I think all those things are just driving people to realize all the potential they have to work more with Flywire, and I think that's what you're likely to see, right? We're sitting there with the regulated infrastructure to process complex payments and we have industry-leading software, and we have an amazing team. And I think that combination is really powerful and hard to beat. Daniel Perlin: Yes. Totally makes sense. Just a quick one on travel. Understanding that you guys obviously tilt more towards affluent travelers. But have you seen any evidence that higher oil prices or jet fuel or any of those things are putting any kind of organic crimp. I mean, obviously, there's kind of some noncyclical overlays just given the pace of wins that you guys have in that business that would mask it. But like if you thought about it on a same-store basis, are you seeing anything creep in yet? Michael Massaro: Yes. So this is Mike again. I haven't seen anything creep in. Obviously, Q1 was good, as Cosmin mentioned in travel. I would say, I'd just point obviously something that causes us to continue to be prudent in how we talk about the year. It's early in the year. You started to hear a little bit of disruption around oil availability for airplane travel. It's something we're watching closely. Haven't seen any impacts yet. Again, you're exactly right. We're dealing typically with a luxury traveler. And if they've kind of committed to this once in a lifetime or big trip a year, if something changes in their logistics, they're probably going to figure out how to go a little earlier or adjust around some of those changes. And so that's our expectation. Our clients haven't seen any hit yet. But obviously the world is quite dynamic and we continue to be prudent in how we talk about the year. Operator: Our next question comes from Chris Kennedy with William Blair. Cristopher Kennedy: Cosmin, thanks for the comments on the data platform initiative. Is there a way to think about kind of where we are in that journey and when most of the benefits that you talked about will be fully realized? Cosmin Pitigoi: Chris, thanks for the question. And certainly, as you can probably tell, a very exciting and passionate kind of area for me. So we're sort of, I would say, we're past the early innings. We're certainly deepened already in sort of the architecture and systems integration side. And we have a very ambitious -- one of the reasons you see G&A, that area kind of investments. This is where we're putting a lot of investments there. So already kind of lost to the races and expect as you get into next year, a lot of that platform around the data and the systems architecture and the capabilities will be built out, but we're actually seeing some early results even now we're doing some work around how we manage vendors internally, how we manage a lot of our processes. So you're seeing some of that already play out. But I would say exiting this year into next year, you'll see a lot more. And I think with the launch of some of the new tools certainly Claude, as many of us here are using that on a daily, hourly basis. The sort of acceleration and amplification of the impact of what we're putting in place, we're even more excited about it. So certainly look forward to that. Cristopher Kennedy: Great. And then it was great to see the Penn State win. Can you just talk about kind of the traction or the momentum that you guys have for SFS in the U.S.? Rob Orgel: Yes, I can take that. This is Rob. As you called out, we announced the go-live for Penn State. Just recently, we announced Cornell today, along with Flagler. We've announced a number of other wins over recent quarters here in the U.S. And I think there's a bunch of things going on that are helping us build this momentum, right? So there is this theme of vendor consolidation that is strong, and I referenced there's a strong push for modernization that's happening inside our client base, particularly inside U.S. EDU. And I think the third thing that's happening that I'd call out is sort of our reference base of clients is growing. So sort of our reputation and our standing in the segment continues to improve as the premier provider of SFS and domestic type capabilities. That along with the skill of our team is all what's driving our momentum. Operator: Our next question comes from Michael Infante with Morgan Stanley. Michael Infante: Can you just break down what you're seeing with respect to payer retention at schools that are only using cross-border payments versus schools that have adopted domestic payments and SFS? Are you beginning to see evidence that SFS is improving payer retention just given the traction that you guys are seeing on the net new side? Michael Massaro: Yes. So this is Mike, and I'll let Cosmin make some comments, too, about the different cohorts of users as well, but I'll let him jump in on later. But I would just say, in general, remember, when you get SFS, you get all the volume, right? You're getting all the tuition dollars, whether they're coming in, be a cross-border, whether they're coming in domestically. And so for us the core strategy is to own that student account portal. And if you own that student account portal, you get full utilization. And so obviously, as you're dealing with just a cross-border solution, you're getting a percentage of that, Cosmin's spoken in the past about what that is. I'll let him comment. Cosmin Pitigoi: Yes. So if you look -- because one of the questions we always get is around the U.S. in particular. So in the U.S., you can think of the U.S. revenues, for example, last year, about 1/3 each, 1/3 is first year, 1/3 is first years of international, about 1/3 that are sort of every other cohort, if you will, international and another 1/3 is domestic. So that 1/3 of first year and existing cohort of international students, we see, as Mike said, the continued retention from that comes from a few different sources. One, we talk about the domestic expansion. So the more SFS, domestic full suite we have, the better that retention gets. Second, we obviously can improve user experience and as we work on that. So that is also the second thing. And then third is all of our banking partnerships in those source markets help us to improve that retention. Now we don't have a lot of that necessarily baked into guidance. We're taking a prudent approach with that. But we're seeing good trends around retention and overall, feel good about the mix of the different cohorts over time, even with, again, I'm sure the pressure on that first year part of it. Michael Infante: That's helpful. And then maybe just on the macro side of the equation, obviously, you saw the reiterated assumptions on some of the visa trends. Can you just sort of level set with us in terms of what you're seeing by market? It looks like the U.S. and Australia broadly tracking with those expectations, maybe the U.K. and Canada, a little bit soft. Just what are you sort of seeing with respect to things like deposit trends and your conversations with schools and agents? Cosmin Pitigoi: Yes, I can start. So yes, our macro assumptions haven't changed. So for the U.S., while even last year, we didn't see much above sort of 20% as you're getting to the mid part of the year into September. For U.S., we've assumed visa is down 30%, which is quite prudent as we look into it. Look, we've looked at some of our data. And if you look at some of the application data, it's down sort of in the high single digits as we've mentioned before. So not yet, and again, you saw the performance in Q1 quite strong, but we're not counting on that for the rest of the year. We're taking a prudent approach as we think about the Q3 peak. So that's in the U.S. And certainly, lots of headlines, lots of headlines everywhere technically, but we've taken a pretty prudent approach across the board. Canada, again, coming off several years of being down almost 60%, we've assumed down 10%. Again, lots of headlines there, too, but so far, we feel pretty good about our path to basically continuing to -- now that market actually growing again for us, which is great to see, and again, driven by a lot of our new client wins. And then U.K., Australia, roughly flat visas, again, some headlines there, but overall, both of those markets are growing faster than the visa trends, which is kind of what we normally watch for. So hopefully, that's helpful. Operator: Our next question comes from Jeff Cantwell with Seaport Research. Jeffrey Cantwell: I apologize if I missed this earlier. I want to see if you could elaborate maybe a little bit more on RLAS growth which grew faster than your TPV growth this quarter, that was by over 600 basis points. What are you seeing in terms of the underlying strength in RLAS analyst growth across your 4 businesses that are the biggest drivers of that? And could you maybe help us understand on your outlook for the remainder of the year? How durable is that spread between RLAS growth and volume growth? Or what are the main things to be thinking about? Cosmin Pitigoi: Jeff, thanks for the question. Yes. So in general, when we look at the spreads, still pretty stable overall, as you saw in my prepared remarks, Q1 was a slight jump, but as you've seen in the past, there's volatility from one quarter to another in that number. But overall, we feel pretty good about the -- it is not necessarily an impact of pricing, for competitive pricing specifically, but really it's a mix effect. So overall, spreads are pretty stable and feel good where we -- as we look ahead for the rest of the year. Jeffrey Cantwell: Great. Okay. And then if I could just squeeze in a quick follow-up. On AI, I'm curious if you guys are thinking about that as an OpEx opportunity as well. We're seeing some of the payments companies, payment/software companies start to rationalize some of their OpEx lines in the spirit of we are finding efficiencies on the AI side of things. I'm just curious what your thoughts are there? And maybe if you're seeing some opportunities as you think out over the next, call it, a year or 2 years and so forth. Michael Massaro: Jeff, it's Mike. So I think there's huge opportunity for us internally and externally. So if you look at internally, imagine, we've all various teams inside Flywire leveraging it, whether it's product designs faster, whether it's development faster, whether it's -- we have some great stats on the call around customer support in ways we're leveraging it. So I think every company has to be looking at a world in which they're going to become more efficient. They're going to be able to do more with less as they grow their business over the next couple of years and that's how we're thinking about it here at Flywire. So I'd say we're definitely thinking about it. I share Cosmin's excitement about the data and the transformation efforts we have at the system layer and being able to do that at a time when so much is emerging around AI, it's really -- it's a lot of fun running a company when you have all those different tools at your disposal. Operator: Our next question comes from Nate Svensson with Deutsche Bank. Christopher Svensson: I want to follow up on a couple of questions that have been asked earlier. First on SFS, obviously, nice to see all the new wins. I was hoping you could remind us on how long it takes for the SFS deals to ramp once you sign them. I think the typical SFS contract is something like a low single-digit million revenue contributor on an annual basis. Maybe that old commentary was U.K. specific. So you can correct me if I'm wrong there. But really just wondering how long it takes for these wins from 1Q to ramp and then fully flow through to the P&L for the year. Rob Orgel: Nate, it's Rob here. So from the time of a client go live, we would expect that ramp to essentially initiate right away, but to get to the full maturity, what we would call the target ARR in the way we look at these things, you'd expect that to take you well into the second year, right? You've kind of got the adoption and learning cycle that comes with the payment plans. You've got the full rollout of all the other capabilities that may follow the initial launch. So that's the -- that's kind of the range of time frame that we'd be focused on for achieving the significant majority of that would be the target ARR. Christopher Svensson: Got it. Helpful. And then I did want to ask for a little more color on the January education outperformance. I think you had called out that it was some of your key markets. So I assume that's Big 4, but I was hoping for a little more specifics there. I know Canada returned to growth in 1Q, but I don't know if that was a driver of the outperformance relative to expectation or if there was better performance in some of the other markets, U.S., U.K., Australia that caused you to call out January specifically? Cosmin Pitigoi: Yes. It's your latter. So it's actually -- it's U.S. and U.K. with a bit of Australia. We saw sort of strong from a destination market. And then -- and we saw that coming from across our main corridors that we usually see. We also saw some strong domestic performance within the U.K. where we continue seeing strong growth. So those are the markets, U.S., U.K., Australia with, again, kind of our main corridors and as far as the outperformance and a bit of the domestic performance in the U.K. And again, that's why we're also just being prudent. We're not flowing that through into the rest of the year, but feel good that we had that strong start to the year. Operator: Our next question comes from Charles Nabhan with Stephens. Charles Nabhan: Congrats on the result. Good to see another strong quarter of bookings activity. I was hoping you could comment on the composition of those bookings as well as whether you're seeing any changes in the size of the new clients that you're bringing in? Michael Massaro: This is Mike. So we're actually seeing a whole bunch of positive trends. So we even time to signature being faster, but deal size being up and the number also being up from prior quarters. So again, back to that kind of 200 range that we had talked about in previous quarters. So we feel good about all those metrics. Again, I think, Rob mentioned a little bit earlier, just some of the reasons. Again, I think it's great execution by our go-to-market teams. I think you're seeing us continue to kind of cross-sell exceptionally well with that land and expand strategy, and I think that's what's driving it. Charles Nabhan: And as a follow-up, you've announced a number of new integrations over the -- in partnerships over the past few quarters. And it sounds like you have the key ones in place like Ellucian and Oracle, Workday. But Curious as we think about the medium- to long-term outlook of the business, how much opportunity is there to expand business through new integrations. If you could give us a sense for how we should think about that portion of the TAM, that would be helpful. Rob Orgel: Yes. This is Rob. I can jump on that one. So there's really 2 dimensions that get us excited about the partnership piece. So first is having coverage across the key partners that really matter in our verticals. And so the most recent one that we announced was the partnership with Workday, which we are indeed very excited about. But that builds on successful capabilities we have across the other major systems in education namely Ellucian and PeopleSoft for Oracle or the Oracle Suite but know that we have partnerships in a whole bunch of other parts of the world that are relevant for the work that we do there. And so we take a lot of pride in the work that's done by that integrations team and it's what helps make it possible for us to do things all around the world. Operator: Our next question comes from Madison Suhr with Raymond James. Madison Suhr: I wanted to start on the payment processing ramps. So you raised the expected contribution from 2% to 3% to 4% for the year. Just how much of that increase was driven by existing signings that you already have in place that are maybe going live more quickly or seeing greater volume than you initially thought versus how much of that incremental 150 basis points was driven by new customer signings throughout the quarter? Cosmin Pitigoi: Madison, thank you. Yes, it is all the existing signings and it's really the Cleveland Clinic. And some of the B2B invoice migration that we talked about -- so as those existing ramps. Just obviously, you saw a much stronger Q1 performance from those coming through and we expect that to continue into Q2 and then you sort of lap it as you get into the second half, but it's existing clients. Madison Suhr: Okay. Got it. And then just a follow-up here on incremental margins. So it looks like the updated guide implies like a low to mid-30% incremental for the year. I understand that there's some investments in 2Q, but it does seem like the second half will need to step up even from 1Q levels. So Cosmin, maybe can you just help bridge what gives you the confidence that incremental margin should accelerate in the second half? Cosmin Pitigoi: Yes. Thank you. Yes, partially, it's a dynamic of lapping last year. So we had a number of investments even in the second half of last year. And so we're lapping that. So that's why we feel good that we're going to see that acceleration into the second half and also just on the investments start to pay off. So I feel good about the sort of mid-30s for the year with higher kind of leaning into second half. And then 24% to 25% EBITDA margins into next year certainly look like well within our sights then as we exit this year with that kind of strength. Operator: Our next question comes from Patrick Ennis with UBS. Patrick Ennis: So on Cleveland Clinic, I know you talked about maybe some higher margin revenue coming online in Q2. Just wanted to confirm that's still the case and should be supportive of gross margins, all else equal. Rob Orgel: This is Rob. I can jump in there. You said that exactly right. So as we called out earlier in the explanation for the rollout plan for Cleveland Clinic, we went with the payment processing first and the software piece is what comes next. Still on track for Q2 launch. And just as you say, that improves the margin of the overall Cleveland Clinic opportunity. Patrick Ennis: Okay. Awesome. And then just on the hospitality business, I mean, impressive TPV growth there. Could you talk about maybe the success you're having in cross-selling payments into Sertifi clients? And then maybe just talk more generically about what the net take rate looks like there compared to kind of maybe some of the more non-cross-border-related volume you have, so domestic education, B2B, healthcare payment processing? Michael Massaro: Yes. So this is Mike. I guess what I'll say is that was a core thesis when we acquired the Sertifi hospitality business, and I think the team is doing a great job executing, right? We knew that there was a lot of volume that was kind of going through that workflow in that software. And we knew with our kind of focus on our network, we could monetize more of that volume. And so the team is doing a great job doing it. Plenty of room to go on that. It's a multiyear synergy that we've always talked about. And I would say you can think about that monetization as mostly being domestic. Remember, 20,000 hotel locations in the United States were the primary customer set of that. And as we go international, you can expect some of that to be a little more cross-border there. The U.S. volume does have some ACH and some card, but I think you can think about it kind of as domestic volume monetization initially with international expansion and expected more foreign exchange impacts potentially as we go international with that product. Operator: Thank you. That's all the time we have for questions. This does conclude the question-and-answer session. You may now disconnect. Everyone, enjoy the rest of your day.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 BlackLine Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Matt Humphries, SVP of Investor Relations. Please go ahead. Matt Humphries: Good afternoon, and thank you for joining us today. With me on the call are Owen Ryan, Chief Executive Officer of BlackLine; as well with Patrick Villanova, Chief Financial Officer. With the Q&A portion of today's call, we'll also have Jeremy Ung, BlackLine's Chief Technology Officer, join us. Before we get started, I'd like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives and expected performance, in particular, our guidance for Q2 and full year 2026 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements made during this call are reasonable, actual results could differ materially, and these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our periodic report filed with the Securities and Exchange Commission, in particular, our Form 10-K and Form 10-Q. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. All comparisons we make today on the call will relate to our corresponding period of last year, unless otherwise noted. Unless otherwise stated, our financial measures disclosed on this call will be non-GAAP. A discussion of these non-GAAP financial measures and information regarding reconciliations of our historical GAAP versus non-GAAP results is available in our earnings release and presentation, which may be found on our Investor Relations website at investors.blackline.com or in our Form 8-K filed with the SEC today. Now I'll turn the call over to BlackLine's Chief Executive Officer, Owen Ryan. Owen? Owen Ryan: Thank you, Matt. Good afternoon, everyone. At our AI investor session in March, we shared our technology vision in detail and made our case for why BlackLine is positioned to be the trusted governance and control layer for CFOs deploying AI across their financial operations. Today is about sharing with you the momentum we are building as we translate that vision into reality. Our Q1 results demonstrated that our strategy is working, delivering solid top line growth and profitability. Revenue grew to 9.7% year-over-year and non-GAAP operating margin improved to 21.6%. These results are underpinned by progress on our key strategic initiatives. The adoption of our platform, Studio360 continues to build with the metric reaching 13% of eligible ARR up from 11% in Q4. More importantly, we are seeing this strategy translate into deeper customer commitments. This is best reflected in our remaining performance obligations, or RPO, which grew 18% and driven by the longer contract terms that are inherent to our new platform strategy. Let me go deeper into our platform strategy and commercial model. Platform adoption maintained a healthy pace following Q4 seasonality with 94% of the eligible new bookings landing on platform pricing, a strong signal that our commercial model is becoming the standard for how customers buy BlackLine. We also saw continued migration activity from existing customers in Q1. Our teams are actively engaged with customers preparing for platform conversion ahead of their upcoming renewals. This new model is also positively changing our deal economics. Average new deal size this quarter was up 85% to $162,000 driven by platform and strategic product sales. Our standard offering now includes a broader set of capabilities on Studio360, which naturally increases the initial land. Our platform model allows us to sell units of financial productivity rather than seats, which, over time, we believe opens access to labor and operational budgets beyond traditional software spend. It also creates the natural expansion path for our agentic AI offerings. The model works like this, as customers adopt our platform, they commit to a platform fee that provides access to the full breadth of our capabilities within a framework of governance, reliability and control that they and their auditors already trust. As they then deploy Verity agents and automate work that was previously manual, consumption-based pricing layers on top of that base, similar to how we price capabilities like matching today. That alignment between how our customers drive efficiency and how we capture value, all within a trusted control environment is fundamental to what we are building. When we look at the full picture, we believe that a platform that provides broad access, embedded AI driving deeper daily engagement and agentic offerings layering consumption on top meaningfully increases the lifetime value of a BlackLine customer. This brings me to what I believe is the most important topic on today's call, AI and our Verity portfolio. Last month at our BeyondTheBlack Conference in London, we introduced agentic financial operations, a new operating model that defines how the office of the CFO harnesses AI safely, strategically and at scale. The response from customers, partners and the broader market has reinforced our conviction that we are addressing the right problem at the right time and with the right approach. The opportunity is straightforward. As an enterprise deploys AI agents across their business in procurement, sales operations, accounts payable, they are creating new uncontrolled financial touch points that need to be governed. Every one of those AI-generated transactions eventually hits the general ledger. Everyone must be reconciled, validated and audited. For a CFO, who personally attest to the accuracy of financial statements, that is a responsibility that requires a trusted platform. Agentic financial operations is designed to close this governance and trust gap. Every action an AI agent takes within BlackLine leaves a digital footprint identical to a human user, full chain of thought, immutable audit trails embedded controls. This is what CFOs demand what audit committees rely upon and what auditors require. The market reaction from customers and partners since our London launch has been encouraging. Customers are telling us they want to leverage what we are building and provide input on our road map rather than try to build these capabilities themselves. Their ROI framework is clear, make their finance operations more durable and competitive and let a trusted partner handle their AI infrastructure so they can focus on running their business. Before I walk you through what Verity is delivering commercially, I want to spend a moment on how we build because the pace of our innovation is becoming a strength. We are using AI to fundamentally accelerate our own product development. Our engineering teams have adopted AI augmented coding practices across our development workflows and the results are measurable. The time from idea to production has decreased 22% versus last year. We are shipping capabilities faster with fewer resources and at a higher quality. This is a structural improvement in R&D productivity that we expect to compound over time. That increased velocity is translating directly into how we deliver value. Our customers have benefited from our foundational AI capability since last year. We are expanding further into Agentic AI. A year ago, Verity agents were a strategic vision. Today, we have multiple purpose-built agents in market in preview are launching in the near term. Combined with our new AI innovation hub and a fully integrated AI native acquisition, we are executing against our AI road map with clear deliberate focus. Now let me share what this engine is producing for our customers. Over the past year, we have been building and refining our embedded Verity AI capabilities like Verity Assist, Verity Narrate and Verity Flag and close collaboration with our customers, their auditors and our partners. That feedback loop has been critical, allowing us to validate not just performance, but the trust and governance framework around them. Even before we broaden access, adoption among early users was doubling every quarter. In Q1, with that validation in hand, we made these capabilities standard across most of our customer base. Over 2/3 of our customers are now actively using these tools, a 285% increase in adoption quarter-over-quarter. In Q1 alone, unique users grew 68% and total usage grew 183%. What this tells us is that AI is moving beyond experimentation for our customers and into their day-to-day workflows. As they embed these capabilities into how they operate, it deepens their relationship with BlackLine. Over time, we expect that to support both stronger retention and additional consumption under our platform pricing model. Verity Prepare, our AI-powered reconciliation agent is now available to customers and is deployed with several mega enterprise customers. The validated outcomes customers are seeing are significant, over 90% reduction in reconciliation processing time. One customer that had been spending 3 hours manually executing certain reconciliations has seen that fall to 10 minutes and 95% time savings. Based on their experience, they are now ready to enable Verity Prepare broadly across their business. That progression from pilot to enterprise-wide rollout is exactly the adoption pattern we are building toward. Early usage data shows the cost to serve is efficient at current scale with clear paths to optimize further as adoption grows. Our multi-model architecture allows us to deliver meaningful customer value at margins consistent with our financial targets. Verity Match is now in its early adopter phase. Our existing matching solution is a powerful capability as it handles high-volume, complex data sets across multiple ERPs and source systems and deliver strong automation rates for our customers. Verity Match builds on that foundation by applying AI to the long tail of complex exceptions like combined vendor payments, transposed invoice numbers, missing remittance details. Rules-based systems have historically left these for accountants to resolve manually. In early customer testing, we see a 64% reduction in transactions requiring manual investigation. And by running our models on NVIDIA GPUs, we can process matches up to 25x more cost efficiently and faster than on prior architectures, improving both the customer experience and unit economics as this scales. Verity Collect will launch this quarter and the demand signal has been stronger than expected. We had to close our early adopter program because customer demand exceeded our planned capacity. The value proposition is direct. Predicting payment delinquency before an invoice becomes past due and autonomously managing the collections outreach across voice, e-mail and digital channels. For CFOs, this translates directly to working capital improvement, which in the current macro environment is a top priority. While it is still early, we believe the initial proof points are compelling in one early adopter scenario our AI agent completed collections outreach activities in under 30 minutes that would have taken a human team of approximately 45 hours. That kind of efficiency gain, freeing collection teams to focus on high-value accounts and complex disputes is exactly what is driving the demand we are seeing. We expect Verity Collect to be a meaningful accelerant to our broader invoice to cash momentum as it scales. Verity Accruals has seen a significant acceleration in customer interest and pipeline growth as its value proposition resonates in the market anchored by initial successes including closed deals and proof of concepts with key targets in both the enterprise and mid-market. These are largely existing customers looking to expand their footprint, which validates the cross-sell motion we have been building. Customers land on Studio360 and then adopt additional Verity agents as they see results. One advantage worth highlighting is that our customers do not need to build a new governance framework to deploy Verity. BlackLine already is that framework. Verity agents operate within the same SOX compliant controls, audit trails and approval workflows our customers have relied on for years. Customers can begin deploying AI within a controlled environment today and their auditors already trust, which we believe lowers the barrier to adoption and supports a faster path from pilot to broader rollout. Turning to how this strategy aligns with our Q1 execution, our platform and AI approach is showing consistent progress in the enterprise. This sustained focus is reflected in our metrics. First, we saw an increase in customers with over $1 million in ARR. We closed the first quarter with 86 customers at this level, an increase of 9% year-over-year along 14% growth in our $250,000-plus customer cohort. Second, this strategy is driving deeper adoption and additional cross-sell across our portfolio. Our strategic products represented 37% of sales in Q1, up from 33% last quarter and 27% in the prior year. This proves that when we lead with value and outcomes, customers invest more deeply in BlackLine, adopting more solutions with less friction. And third, you can see the strategy in action and key wins from the quarter. Within our existing customer base, we saw a significant validation for our AI offerings, particularly Verity Accruals. We secured a major renewal and expansion with a leading billing company, demonstrating their deep loyalty to BlackLine and strong interest in our AI capabilities. We saw similar momentum with a leading global mobility and car sharing company, which also expanded its footprint with a strategic win for Verity Accruals. Our upmarket motion and governance thesis also continues to resonate strongly in highly regulated and complex environments. This quarter, we welcomed one of the nation's largest health care providers as a new logo replacing an ERP competitor, which is a powerful validation of our trusted control framework and innovation. We also saw significant expansion within our enterprise base, including a premier global construction services company that added our invoice to cash solution. Additionally, we executed a major rip and replace at a leading fintech provider, successfully displacing multiple competitors to consolidate their financial operations on to BlackLine, adopting Studio360, Journals, reconciliations and Transaction Matching. Last, we delivered highly strategic wins, particularly among companies at the forefront of the AI revolution. We secured a net new agreement with a global leader in memory and data storage for AI, successfully migrating their processes off an ERP competitor and on to BlackLine. Through that same channel, we also expanded our footprint with one of the world's premier data and AI platform companies. The fact that organizations building the future of AI rely on BlackLine for their own financial governance speaks to the strength and trust of our platform. We believe our customer base is healthier than our headline retention metrics suggest and it is getting stronger. The lower mid-market churn we have discussed in prior quarters is running through a finite and shrinking pool of at-risk accounts. At the same time, the changes we have made, platform pricing that creates stickier customer relationships, a broader solution footprint per customer, increasing multiyear renewal commitments and a redesigned customer success model are fundamentally improving the quality of our installed base. We expect the cumulative effect of these changes to become more visible in our retention metrics as we move throughout the year and into next. Finally, our partner ecosystem and our SAP relationship continue to be meaningful contributors to growth. Our integration with SAP's advanced financial close is now generating pipeline as we were able to sell into SAP's installed base of AFC customers. Our Joule, Verity proof of concept is also progressing toward a commercial framework, and we are actively working to launch platform pricing within SolEx. We are also seeing acceleration in our public sector business through SAP with several active deals in the pipeline. We see our partner ecosystem as a force multiplier across demand generation, delivery and customer success and is critical to scaling our growth. In closing, our path forward is clear. AI is creating more financial activity across the enterprise, not less. All of it must be governed, reconciled and audited. We are the system of record and control that makes this possible. Our customers are telling us they want to move fast with AI, but they also tell us that trust, reliability and security are nonnegotiables. This is exactly what 25 years of BlackLine expertise delivers. With that, let me turn it over to Patrick for a detailed review of our financial results and our guidance. Patrick Villanova: Thank you, Owen. As discussed, our strategy is building clear momentum, and our Q1 financial results reflect that progress. We delivered solid top line growth, demonstrate the quality and durability of that growth through our key strategic metrics and showed significant leverage in our operating model. Let me walk you through the details. Total revenue was $183 million, up 10% and with subscription revenue growing 10% and service revenue growing 11%. The acceleration in services reflects the faster implementation time lines and go-live activity we are driving through our delivery engine. ARR reached $712 million, up 9%, reflecting the bookings momentum we saw in Q4, carrying forward and continued strength in platform and strategic product adoption. Importantly, we believe the quality and predictability of our future revenue growth is strengthening. This is best illustrated by our RPO, which grew 18% to $1.1 billion fueled by larger deal sizes and longer contract terms inherent to our platform model. Similarly, the health of our near-term pipeline is also reflected in our current RPO growth of 12%, which underscores the solid market demand for our solutions. This momentum is directly linked to the steady adoption of platform pricing, which reached 13% of ARR at quarter end, up from 11% in Q4. Calculated billings growth was 9% in the quarter, our trailing 12-month billings growth, which helps normalize for quarterly variations, improved to 9%. Turning to the health of our customer base. Our key metrics remained solid across our 4,300 customers. Net revenue retention was 105%, which includes an approximate 1 point headwind from FX. Underlying expansion within our installed base remains solid, driven by 2 dynamics: customers migrating to platform pricing, which naturally expands the scope of their relationship with us and strong attach rates for our strategic products, which represented 37% of sales this quarter. Customers are investing more broadly in BlackLine and our platform model is making that expansion easier and faster. On retention, our revenue renewal rate was 93%. Enterprise renewal rates remained strong at 96%, consistent with the durability we have seen in this segment, the lower mid-market headwind we have discussed in prior quarters continue to weigh on the overall rate, though the remaining at-risk pool is finite and shrinking. We expect this drag to diminish as we move through the year. Our SolEx channel delivered one of its strongest new bookings quarters as our joint go-to-market with SAP continues to mature. SAP customers now account for over 26% of our total revenue, and we see further opportunity ahead as our broader platform strategy opens new avenues into SAP's installed base of commercial and public sector customers. Now let me turn to profitability and cash flow. Our non-GAAP subscription gross margin improved to 83%. Our non-GAAP gross margin improved to 80.2%, in line with our expectations. Non-GAAP operating margin was 21.6%, reflecting the continued productivity improvements we are driving across the business. We are seeing meaningful efficiency gains from our own adoption of AI and automation in areas like customer onboarding, implementation delivery and internal operations. This enables us to grow revenue faster than expenses while maintaining our investment in innovation. Non-GAAP net income attributable to BlackLine was $40 million, representing a 22% non-GAAP net income margin with adjusted earnings per share growing 14% to $0.56. We delivered operating cash flow of $46 million and free cash flow of $36 million or a 20% free cash flow margin. After paying off our 2026 convertible notes in March, we have approximately $525 million in cash, cash equivalents and marketable securities versus $667 million in debt. Finally, we continue to execute our capital allocation strategy. In the quarter, we returned approximately $47 million to shareholders through the purchase of 1.2 million shares. Before I get into guidance, I want to step back and frame where we are against our multiyear financial targets. We entered the year with a clear objective continue accelerating revenue growth toward double digits, expand operating margin and do both while increasing our pace of innovation. Q1 demonstrated progress on all 3 fronts. Revenue growth accelerated, margins expanded and the pace of our product delivery has never been faster. These results give us confidence to raise our full year outlook. On the specifics, I want to call out a few dynamics that are important for modeling purposes. The first quarter's top line performance included about a $1 million benefit from certain items related to specific customer deployments and timing. These are nonrecurring in nature. Looking ahead, we anticipate a modest revenue headwind of roughly $1 million to $2 million over the balance of the year due to FX. After accounting for both of these dynamics, our Q2 and full year guidance reflect continued acceleration in our underlying revenue growth rate as we move through the year. On the macro, we are not immune to the external environment, and we have built our guidance with that in mind. That said, the financial close is a regulatory obligation, not a discretionary spend item. Our customers cannot defer compliance and the complexity of their financial operations is increasing, not decreasing. Combined with our growing RPO strong multiyear renewal trends and an expanding enterprise pipeline, we have good visibility into the rest of the year. Our raised guidance reflects both that visibility at an appropriate level of prudence given the uncertainty in the broader environment. With that context, for the second quarter, we expect total GAAP revenue to be in the range of $186 million to $188 million, representing 8.1% to 9.3% growth. We expect non-GAAP operating margin to be in the range of 21.5% to 22.5%, and we expect non-GAAP net income attributable to BlackLine to be in a range of $40 million to $42 million, or $0.57 to $0.59 on a per share basis. Our share count is expected to be about 73.3 million diluted weighted average shares. And for the full year 2026, we expect total GAAP revenue to be in the range of $765 million to $769 million, representing 9.2% to 9.8% growth. We expect non-GAAP operating margin to be in the range of 24% to 24.5%. And finally, we expect our non-GAAP net income attributable to BlackLine to be $174 million to $182 million, or $2.42 to $2.53 on a per share basis. Our share count is expected to be 74.4 million diluted weighted average shares. Operator, we're ready for questions. Operator: [Operator Instructions] And our first question comes from Alex Sklar of Raymond James. Alexander Sklar: Owen, maybe first for you on Verity and some of the adoption you've seen there. You spoke to it being a big factor in the majority of the large deals in the last 2 quarters, what are you seeing in terms of adoption and usage from spend new customer cohorts, specifically as they've gone live on BlackLine? And Patrick, maybe can you remind us if there's any consumption revenue embedded in the 2026 outlook? Owen Ryan: Yes, Alex, first of all, good to hear from you. Thanks for the question. I think whether it's a new customer or even an existing customer, things that we're hearing from our -- from that cohort is basically, one, is they want to move at a good pace with AI, move a little bit faster. But what they're also telling us is that they do not want to compromise anything on trust and governance. And so what they're trying to figure out with us when we go in and talk with them is they first tell us that the AI that we're rolling out needs to work within an existing controls environment, which is what we have and what they really appreciate. They want to make sure that the AI that they're deploying has actually been built by people in the business that understand their business. So they're not necessarily enamored with sort of generic AI. And so -- and we sit there and we can talk about the hundreds of billions of transactions that we processed over for all of our customers over all these years and can show the accuracy and effectiveness and efficiency with which that works and then the ability for their auditors to know and rely on it and trust it. That all becomes really important in all of the conversation. And the last thing that we hear from them, Alex, it's not like what we bought today on February 25 is the end all be all. So what they're really looking for is also trying to understand what is our road map? How does it align to their interest? And then how can they potentially weigh in with others in their industry to sort of move forward. And one of the examples of a big win we had this quarter was with a very, very large health care company. Well, if you look at the largest health care companies in the United States, we probably have 9 out of the 10 at this point in time. And so bringing that cohort together to show that experience because they all have those common issues and they're all trying to figure out how to use AI the right way in that environment. So those are the things that we sort of really hear. It's like yes, we wanted to be cutting edge, but more importantly or just as importantly, they want to be able to trust it. They want to make sure it's accurate. It's auditable, reliable and secure. And then emerging probably after the quarter, but there's a lot more conversation now about the total cost of ownership and cost certainty, because what's happening with AI and other parts of the market where people are consuming tokens at a very, very high level without really understanding what they're getting from an ROI perspective. That's what I'm seeing in those conversations. But Patrick, over to you. Patrick Villanova: Yes, Alex, to answer the second part of your question, just to hit the nail on the head, there is a nominal amount of consumption revenue included in the 2026 guide for the remainder of the year. Now with that said, you should start to see that in our leading indicators. The reason for that -- for all the reasons that Owen just said, our customers right now are uptaking these agentic offerings as well as other AI offerings, testing them out, getting comfortable with them, increasing consumption. As they move up through the consumption tiers, we expect to see that show up in our leading indicators, which materializes in revenue in 2027. And the way we're seeing it now, the pace that we're at, we can reassert that at least 50% of our ARR exiting 2026 will be non-seat-based as a result of everything that we just discussed. Alexander Sklar: Okay. That's great color from both there. I appreciate that. Maybe just a follow-up on the strategic product bookings mix. I think that's a new record, can you just talk about the commonality you saw in terms of solution adoption? And then I heard faster adoption of strategic products for those customers under platform pricing. Can you elaborate what you're seeing there with the 13% of the base now on platform? How much of an unlocked that is? Owen Ryan: So I think, Alex, just -- and I want to make sure I understood your question, which was what's driving the strategic product sales into the platform. And I mean, basically, it's the work that Jeremy and his team are doing with Stuart and his team to sort of make sure that the whole system works together seamlessly, that can be implemented by our partners. Our teams are sometimes jointly with our customers who are able to demonstrate faster time to value for what they're being -- what they're asking for. And then I think importantly, as we continue to innovate in those products, we're widening the gap, quite frankly, with anybody that would have been a competitor. So those are the things that I think we're seeing in the market so far. And hopefully, that was responsive to your question, Alex. Alexander Sklar: Great. Thanks, Owen. Owen Ryan: Patrick, do you want to talk about the acceleration of 11% to 13%? Patrick Villanova: Yes, Alex, the second part of your question there, I think what I heard was, does our continual increase in the strategic product mix, is that derivative of our platform approach. And the short answer is, yes, they are related. We would expect to see a continued increase in mix of our strategic products versus nonstrategic because most, if not all of our strategic products are consumption based. Now the second part of that, as customers migrate to our platform, that enables a smoother sales motion of our strategic products. It is a connective tissue, connected fiber between all of our solutions, which allows data to flow seamlessly between them, and that allows us to sell into that customer base with less obstacles. So as we see more and more customers move to the platform, we would expect to see that mix of strategic products continue to increase as well. Operator: Our next question comes from Chris Quintero of Morgan Stanley. Christopher Quintero: I want to ask about RPO, a really nice growth rate to see there. And at a time when there's so much innovation going on in the space, I'm curious from your perspective at a high level, why are customers existing and you like making these such deep longer-term commitments and really tying themselves to the BlackLine story and product road map here? Owen Ryan: Yes. Look, I think, Chris, it's sort of what I just said at the beginning, right? So we've been -- we're in our 25th anniversary, actually officially June 2 for those who are paying attention to that. But I think it's when you've been a trusted partner for the world's leading companies for as long as we have been, there's a lot of safety and security and you think about the profile of our customer that buy. So there is a confidence in that. And then when you sit there and you think about the way BlackLine innovates amongst and between our customer base, our partners, staying close to what the auditors are requiring, what BPOs are trying to do. You bring all that together and you have that much more of a collaborative effort. That's why we announced the innovation hub that we said we were putting out, I guess, about a month ago, we announced that. But all of that is sort of giving them a high degree of confidence about what it is that we're doing. And again, I think we're hearing more and more frequently. We don't want to have to build this ourselves. We'd rather partner with a company like BlackLine. And so you're seeing that longer commitment because these things are not 1 year one-and-done kind of activities. The rollout, the building of AI isn't going to stop 12, 18, 24 months in the future. And so you're seeing a lot of that from a commitment perspective, as to our customers wanting to just partner and go on that journey with us. But Patrick, anything you'd add to that? Patrick Villanova: Yes, Chris, for all the reasons Owen just said, our RPO story is a very good story right now. Delivering 18% overall RPO growth, 12% CRPO growth year-over-year. It's indicative that our customers or new customers that we're landing, they're larger in nature. They're signing up for longer terms right out of the gates. And then coupling that with our existing customers that have been with us for years, they're coming up for renewal and they want to be with us for several more years. They want to continue the journey. They're intrigued by the innovation. They want to be part of this, so they want to partner with us. And not per se, go at it alone. So it's a very positive story underpinning our RPO growth rate and it's indicative that our existing and new customers want to be with us for several more years. Christopher Quintero: Excellent. Super helpful. And then I want to follow up on Verity. Within that early customer cohort that you have adopting the product. What are you seeing from a transaction volume perspective for those customers that are adopting it? And how does that compare versus customers that haven't quite gone there yet? Owen Ryan: Jeremy, you want to take that question? Jeremy Ung: Yes. I think we are definitely seeing repeat engagement from customers using Verity. So that's extremely promising. And with the customers that are doing this, Owen mentioned the 90% time savings in things like preparations activities, that's really what's driving the repeat usage of these capabilities, the value being delivered. And so in the cohort, we definitely see people who are using Verity come back to use Verity again for risk analysis, for narration capabilities, for other analyses. And so that's what's really driving the usage and the transactions from these customers. Operator: And our next question comes from Patrick Walravens of Citizens. Patrick Walravens: Congratulations to you guys on the progress here. Owen, I would love to talk a little bit more about SAP, in particular, when you talk about the public sector opportunity with SAP, there's a couple of things there. I mean, I guess I don't usually think about the public sector and BlackLine because the public sector has kind of different accounting. And then secondly, I did notice that one of your SolEx salespeople moved to SAP focusing on the public sector recently, so I figured there's some connection there. But I'd just love to hear your thoughts. Owen Ryan: Yes. So first of all, the relationship with SAP, in my view, just continues to get stronger and better. I think the collaboration around product road map, customer success work that we're doing around AI together are all things that, from my vantage point, I just -- I couldn't be more pleased with that. Obviously, we all wanted to go faster, but that's just par for the course. But I will say to you, one of the privileges of working with SAP is they're very professional and they're very thorough in what they do. And so sometimes, you might give up a little bit of speed for that professionalism and the thoroughness with which it's done, but it works particularly well. As it relates to public sector. I think we've been signaling now for a couple of years, our move to becoming an IL-2 compliant than IL-4. We've had some wins now in the public sector space. We are going to continue to invest in. We've had a very nice growing pipeline of opportunities with various federal agencies. Those in many ways is a bit of a tailwind for us in the sense that the government is trying to modernize. And Pat, if you're as a taxpayer, I'm going to say this, the government really has a hard time producing any kind of "audited financial statements". And so no matter the basis of accounting, you still have to get it right. And so that's where we've been able to find a real opportunity to grow into that organization. And so yes, so we're excited about that opportunity. Patrick Walravens: Okay. Are there any really big deals in the pipeline on this? Owen Ryan: There's always big deals, Pat. I got to just get them across the finish line. The government spends big when they spend. But they have their selling season, as you know. So that's not until the end of the third quarter. Operator: And our next question comes from George Kurosawa of Citi. George Michael Kurosawa: I'm on for Steve Enders. Maybe you could talk about this move that you discussed on the Verity side from POCs into more scaled enterprise production. How hands-on is that transition process? Is there a component of forward deployed engineers or some similar construct that's required here? How turnkey is it? Maybe you could talk about what the learnings have been in customers making that migration? Jeremy Ung: Yes. So I can take that question. So in terms of adoption, obviously, with the earlier capabilities and in the agentic capability, we've been fairly hands-on with our customers. But we've always had a forward deployed engineered style motion in terms of how we've used customer engineering resources to customize solutions, to customize journal entry capabilities to fit the needs of businesses. And so we're taking the same hands-on approach with the earliest cohort of customers adopting these agentic capabilities, but we are set up well to expand this to a forward deployed engineer motion in the future based on what we already do today with our customers. George Michael Kurosawa: Okay. Great. And then I did want to touch on the platform pricing cadence here. I apologize if I missed this earlier in the call, but I think it was a 7% increase in percent of ARR in Q4 and 2% in Q1. I'm sure this is going to be a bit of a lumpy metric. I'm just wondering if you could just comment maybe there's some seasonality, just the number of at-bats you had and just the dynamics under the hood there and your confidence in doubling the ARR on that pricing model. Patrick Villanova: Yes. Thank you. We're very confident that we're going to reach 25-plus percent by the end of the year in terms of the amount of eligible ARR we have on the platform model. With that said, you hit the nail on the head. Our largest renewal cohorts are in Q2 and Q4, and Q1 is by far the lightest. So we did not expect it to be a linear path from 11% to 25-plus percent by the end of the year, and we're right where we thought we'd be coming out of what is traditionally a lighter quarter in this industry. Operator: And our next question comes from Matt VanVliet of Cantor. Matthew VanVliet: Maybe a follow-up on the SolEx partnership and then kind of a broader question on the overall go-to-market side I think coming into the year or BeyondTheBlack last year, you talked about maybe greater alignment with senior executives at SAP. Curious how much of that is sort of already coming through the pipeline versus being maybe a little bit back half weighted just given the seasonality of that business. And then wrapped around that, just sort of the execution that Stuart had talked about coming in to have more accountability on sort of a daily basis. How is that playing out on both sides of the SolEx and the rest of the go-to-market team? Owen Ryan: Yes. A couple of things. So I'll say again, I think we're very pleased with the progress we're making in trying to team with SAP. As I think you know, I think they report something like their second and fourth quarter, they're very large, and I think 40% of their bookings come in the fourth quarter. So there is a bit of a tail to this, but you're not buying a big ERP systems for the moment. The sales cycles are even longer than ours, as I understand it. But there's great alignment. The teams are working really well. I think you would see it in presales, the incentives are aligned the right way. And there's just more and more success stories that are being created amongst and between SAP system integrators, BlackLine and customers. And so those stories become very compelling when you hear them together because when you're spending the kind of money you have to do an ERP upgrade and then implement BlackLine, you want to make sure the ROI is there. So I feel very, very good about that. I think the -- you look at the work that Stuart is driving on behalf of our team, I think it's going well. I think the one thing that we're learning from our own experience as our deal sizes get larger, there's a few more people around the table and making sure that we understand the different constituencies. So CIOs would be a place that a year ago, we're not necessarily as much of a focus, for us we're having to spend more time with CIOs. Some companies now have the equivalent of an AIs czar. And so we're having -- sort of learning how to work with some of that. And then obviously, the deal sizes are bigger. So it just takes a little bit longer to work your way through that. But I think Stuart is the right guy doing the right things with this team to drive the success that we want. So I feel quite good about that. Matthew VanVliet: All right, helpful. And then as you look at customers that are either already on the platform pricing or maybe on the next list to potentially migrate over to that, is there any different margin structure that you're assuming in sort of year 1, year 2 of those deals that ultimately sort of maybe builds back up? Or how do those -- how does that pricing around both the usage of the platform, but also kind of encompassing the size of the organization and the complexity there, have a margin profile that maybe differs from the seat-based model? Owen Ryan: Yes. So as we just talked about, we're about 13% of our way through. We look at our customer cohorts very carefully that are coming up for renewal in terms of who's eligible for the platform in terms of which customers are most likely to adopt and then which customers are going to consume the platform and at what rate. We've been looking at data for the last year, and early on, but right now, we are not seeing any margin compression as a result of adopting the platform. The cost of delivery on day 1 is not that significant. And so we see the immediate uplift and then we're now monitoring the secondary element of the revenue generation of the platform, which is consumption. So far, based upon what we're seeing, we are not seeing margin compression. In fact, I believe if you see in Q1, we had our highest gross margin in years, and that was as planned. That's part of our migration completion to GCP. We still had some redundancy in data centers in Q1. And for the time being, we expect gross margin to expand throughout the year, and we're not seeing any data points that are contrary to that. But we will continue to closely monitor the impact of AI. Operator: Our next question comes from Daniel Jester of BMO Capital Markets. Kyle Aberasturi: This is Kyle Aberasturi on for Dan Jester. It sounded like a solid quarter for both Verity and for platform deals. I guess just how do you see customers allocating resources between pure AI products and more broader digital transformation trends? Owen Ryan: So I would say our customers are not just looking to buy AI for the sake of AI. I mean I think for our customer base, it's about being part of digital financial transformation journey that happens to have more power being provided because of AI, but people are just not buying whip cream without wanting the cake, if you will. So there's got to be a real foundation underneath all of this is as we move forward. And so I think that continuing to underline everything we do will be the complete platform across record to report or invoice to cash and further powered by what the AI capabilities that Jeremy and the team are building. That's my experience with the market right now, but I'm going to -- I'm looking at both my other presenters here and seeing if they're hearing anything different from our teams in the field. Jeremy Ung: Yes. I think overall, AI, there's excitement about our road map and vision, but it needs to tie to their overall objectives as an organization. And so it's really in support of the transformation objectives BlackLine has always supported and accelerated. And AI is an accelerant to that. It enables that to happen more quickly and with less resources on their side. But ultimately, it ties to the transformation objectives we are already part of. Owen Ryan: Thanks, Jeremy. It ties to being able to fit into the control environment as well, right? Our customers need to understand that there's not going to be anything introduced into the control structure that's going to create an issue for them. Kyle Aberasturi: Great. And just a quick follow-up. The Middle East was an area of investment last year. I guess, just has there been any impact today hitting the business? Owen Ryan: As they like to say timing and life is everything, right? So we -- as for those of you who don't know, really sort of opened up operations at the tail end of last year in Saudi Arabia. We had our first nice win in February, if I remember correctly. And then obviously, the war broke out in Iran at the end of February. So it has had an impact on the environment in the Middle East. But we didn't have lots of big numbers built into our financial plan for this year. I think the thing that Patrick and the team and I are watching very closely is the impact on Europe. That's the one area where we saw some slowdown at the end of the quarter that we're watching to see if there's going to be much more of an impact in that part of the world as the troubles in the Middle East continue to unfold. Operator: And our next question comes from Rob Oliver of Baird. Robert Oliver: Great. You guys hosted a really cool AI event this quarter and some longtime customers that we've talked to over the years like Quest and others like Bristol-Myers were there. And as you talk about the usage ramp and Verity, maybe provide for us a sense or an update for -- as you think about the outlook for this year and the next couple of years, how that Verity usage ramps as you move towards your '27 targets. Within that call, it was fascinating because one of the customers was like, yes, we're all in on it. The other was like we're still dabbling. So just would love to get some more color around the customers that know you and love you, what they're doing with the AI components of the platform? Owen Ryan: Yes. Rob, first of all, good to hear your voice, and thanks for your question. And listen, we have customers that run every end of the spectrum, right? So -- and whether they love it or not, there's still some governance that these companies have in place on how quickly they want to evolve with AI, partly just to their own ability to digest it, part of it, just making sure that every T is crossed, every I is dotted as they move through the alphabet, if you will. And so I think the thing that we saw out of the first quarter again, which was important from my vantage point, was we may have taken longer to get everything into the market. But when it went, we had very, very high confidence that it was going to work. It was reliable, it was trusted because our customers have already kicked the tires as many times as they possibly could. The auditors that sort of, I won't use the word blessed, but had a high degree of confidence in it. And so I think that's the approach that we're going to continue to see. There's going to be some customers that Jeremy and his team want to experiment with us. And I guess maybe the way I would sort of describe it is, we've got customers that want to ride in the Peloton, some of them want to be at the front of the Peloton. Some of them want to be at the back of the Peloton. They don't want to be in group too, right? So they don't want to have fallen away from the pack, but they're sort of, some of them want to drift for a little bit of time just to see how things are unfolding. And I think one of the things that we are trying to do is take advantage of our industry capabilities and get some of these customers to talk to one another, that are in the same industry sector so that they get a higher degree of confidence of what's being used, how it's being used and why they can rely on. But Jeremy, please add. Jeremy Ung: That's also part of why we launched that AI hub. The -- Owen alluded to the fact that we have some customers who really want to be designed partners with us and want to think about be forward leaning about how they expand usage of AI into their organizations, but also how they define it for finance and accounting discipline as a whole. And so that's really what's the intent behind that hub and builds upon our narrative from our AI day, but it's really about pushing the envelope with these customers in a safe, governed and trustworthy manner and being able to design together with them is part of what the leaders in these spaces are looking to. Operator: And our next question comes from Patrick O'Neill of Wolfe Research. John O'Neill: Just a quick one for me. I wanted to ask about the mid-market churn? And maybe can you quantify the growth headwind attributed to that churn, both in the results and then maybe what's factored in the guidance? And then when that does subside, it sounds like towards the end of this year, how should we think about the potential for net retention to expand as we look into next year and beyond? Patrick Villanova: Yes, Patrick. So a couple of data points there. No surprises in terms of where we're going or the results from a customer account perspective in Q1. We've been signaling for well over a year now that there's going to be churn in the lower mid-market and we expect that to slow down in the second half of this year. We're tracking that cohort very carefully and feel very confident that, that number will trend down from a customer churn count perspective as this year evolves. It's a good data point to note that it is a headwind for lack of a better term that we've baked into the guide. There's no surprises there. We've baked it into the plan. We saw this coming. For every customer that we land, the average customer size for new logo is over 3x the size of a customer we lose. So that gives you -- that's a very key data point, not just in terms of our success of the nature and size of customers that we're landing and landing on the platform, but it also is a good indicator in terms of the general size and nature of the customers that are leaving us. So as the year evolves, we would expect some expansion on DBNRR as well as GRR as we work through that cohort and enter 2027. Operator: And our next question comes from Billy Fitzsimmons of Piper Sandler. William Fitzsimmons: I want to double click, I was going to ask about kind of the demand environment outside of North America and the opportunity there, it came up in one of the prior questions. And in the answer, there was a commentary kind of around Europe and some of the macro impacts there that -- can we please double-click on that? What was kind of the impact there, if any, in 1Q? And what are you kind of seeing positive or negative in 2Q since then? Because it's come up in investor conversations about the potential for maybe elevated push up relative to other geos? Owen Ryan: So first of all, broadly, pipeline in the business continues to grow at a very healthy pace all around the globe. So we're not really seeing a significant difference between one geography versus the other. And so that bodes well for what we are trying to do in the marketplace. That said, as we said, the end of March was a little bit less than we would have expected. And so some pretty large deals did get pushed out. I would say to you that business throughout North America looks very solid. Asia-Pac, there's parts of it that look really good. So for Japan, it seems to be doing well for us. And then Europe is okay. I think the thing that I worry more about than the war because it will work its way through when businesses still need to implement BlackLine as we move forward is the tension, the geopolitical tensions between the U.S. and Europe and what that might mean for us for infrastructure we have to build in Europe compared to what we have in North America now. So I know Patrick and Jeremy have been sort of modeling that out. If data sovereignty becomes a bigger, more pressing issue, then we're ready to deal with it. We know how to deal with it. We just obviously built something in Saudi Arabia. But that is the one thing that I am watching. I think we can work our way through the macroeconomics pretty well. But I want to make sure we also don't lose sight of is the geopolitical issues that could have an impact on investments we would need to make in the business maybe later this year or to '27 or '28. William Fitzsimmons: Super helpful. Glad to hear about some of the momentum in specific geos like Japan. Operator: Our next question comes from Adam Hotchkiss of Goldman Sachs. Adam Hotchkiss: Patrick, I just wanted to start with you. I think you mentioned the $1 million nonrecurring benefit to Q1. Could you just maybe help us understand that a little bit better what that was and why that's not recurring? Patrick Villanova: Yes, Adam, it has a little bit to do with the timing of implementations, the timing of delivery, it's onetime in nature. But I think, Adam, the key takeaway is even though we had $1 million of onetime benefits in Q1 from a top line perspective, we're passing along all of that into the guide less FX headwinds. So overall, we did not view it as a headwind to the update and increase of the guide for the full year. And of the $2.1 million beat, we're passing about half of that into the full year guide. The other half being an FX headwind from where rates were at the time we established the guide for the year. Adam Hotchkiss: Okay. Yes, that's helpful color, Patrick. And then, Owen, just any updated thoughts on win rates or the broader competitive environment? I know way down market, there are some AI native full-stack ERPs that are getting a lot of funding that are probably serving companies nowhere near the size of where you are. But curious, just broadly for the enterprise players and sort of where you stand, how that's going? Owen Ryan: Yes, I'm going to say this, and I'm probably going to regret it in some ways, but it feels to us like our ability to compete at the enterprise, we've distinguished ourselves even more from our traditional competitor set. I think the robustness of which Jeremy has built, the completeness of the road map, the work that we've been able to do to improve time to value, provide more certainty around cost of ownership, continuing to be viewed as a very collaborative player as to what we do has been good to see in the enterprise space. And you can see that in our pipeline as it's growing. The number of opportunities isn't necessarily growing very large, but the dollar size is increasing nicely, and that's in the enterprise space, and we're pretty encouraged by the number of 7-figure deals that we have in front of us for this year and next year. Operator: I'm showing no further questions at this time. I'd like to turn it back to BlackLine's CEO, Owen Ryan, for closing remarks. Owen Ryan: Thank you, and thank you all for taking the time to listen to our call today and to ask questions about our company. We appreciate your interest in us, and we look forward to catching up and talking more soon. Thanks, everybody. Have a great night. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good day, and welcome to the Key Tronic's Fiscal Year 2026 Third Quarter Investor Call. Today's conference is being recorded. After the presentation, we will begin the question-and-answer period. At this time, I would like to turn the call over to Tony Voorhees. Please go ahead. Anthony Voorhees: Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Key Tronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here at our Spokane, Washington headquarters is Brett Larsen, our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events of the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically our latest 10-K and quarterly 10-Qs. Please note that on this call, we will discuss historical, financial, and other statistical information regarding our business and operations. Some of this information is included in today's press release. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast, and the link can be found on our Investor Relations website. In addition, the slides, together with the recorded version of this call, will be available on the Investor Relations section of our website. We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and the reconciliations to the most directly comparable GAAP measures are provided in today's press release, which is posted to the Investor Relations section of our website. For the third quarter of fiscal year 2026, we reported total revenue of $89.6 million, compared to $112.0 million in the same period of fiscal year 2025. Year-over-year revenue for the third quarter of fiscal year 2026 continued to be adversely impacted by reduced demand from a legacy customer and an end-of-life program. Additionally, we also faced temporary challenges during the quarter related to winter storm Fern in the Southern U.S., customer design delays on a new program with a legacy customer, and delays in receiving allocated components on a separate new program. For the first 9 months of fiscal year 2026, our total revenue was $284.6 million, compared to $357.4 million in the same period of fiscal year 2025. Despite these short-term impacts, we are already seeing activity improve, with demand returning from several legacy customers and multiple new programs continue to launch and ramp, driving expected revenue growth for the fourth quarter. Importantly, even with lower revenue in the third quarter of fiscal year 2026, we delivered an improvement in gross margin compared to the prior year period. This demonstrates the operating efficiencies gained from our cost-cutting initiatives during the past 2 years. Gross margin was 8.0% and operating margin was negative 0.3% in the third quarter of fiscal year 2026, up from 7.7% and negative 0.4%, respectively, in the same period of fiscal year 2025. Excluding the charges related to the China closure, which we will discuss in a moment, the adjusted gross margin was 8.5% for the third quarter of fiscal year 2026, up from 8.4% in the same period of fiscal year 2025. These results demonstrate that our business today is structurally more efficient and better positioned to generate margin as volume returns. In line with our long-term strategic plan, we continue to prepare for anticipated long-term growth by executing our nearshoring and tariff mitigation strategies to reduce costs while maintaining the diversity and flexibility of our key locations and capabilities. During the quarter, we continued to wind down manufacturing operations in China, shifting more production to our expanding facilities in the U.S. and Vietnam. The China winddown is expected to be completed by the end of the current fiscal year and anticipated to save approximately $1.2 million per quarter following completion. As top line growth returns, we anticipate margins to be strengthened by the improvements in our operating efficiencies and the positive impact of our strategic cost-savings initiatives. We also believe the recent cost-savings initiatives have made us more competitive when quoting new program opportunities. As production volumes increase and our operational adjustments take full effect, we expect to see greater leverage on fixed costs, enhanced productivity, and a more streamlined supply chain, all contributing to stronger financial performance. The reduction in revenue had a significant impact on our bottom line. The net loss was $2.6 million, or $0.24 per share, for the third quarter of fiscal year 2026, compared to a net loss of $0.6 million, or $0.06 per share, for the same period of fiscal year 2025. For the first 9 months of fiscal year 2026, the net loss was $13.5 million, or $1.24 per share, compared to net loss of $4.4 million, or $0.41 per share, for the same period of fiscal year 2025. Our adjusted net loss was $2.8 million, or $0.26 per share, for the third quarter of fiscal year 2026, compared to adjusted net income of $0.1 million, or $0.01 per share, for the same period of fiscal year 2025. For the first 9 months of fiscal year 2026, our adjusted net loss was $3.9 million, or $0.36 per share, compared to adjusted net loss of $1.2 million, or $0.11 per share, for the same period of fiscal year 2025. Our focus on operating discipline continues to support a strong balance sheet. Our inventory for the third quarter of fiscal 2026 is down $13.5 million, or 14.0% from a year ago. Our current ratio was 2.1:1 compared to 2.7:1 from a year ago. At the same time, accounts receivable DSOs were at 85 days, compared to 92 days a year ago, reflecting stronger collection on receivables. Year-to-date cash flow provided by operations for the first 9 months of fiscal year 2026 was approximately $10.0 million, as compared to $10.1 million for the same period of fiscal year 2025. Our continuing ability to generate cash from operations has allowed us to reduce debt year-over-year by approximately $14.3 million and helps position us well as demand accelerates and new programs ramp. Capital expenditures in the third quarter were minimal, while year-to-date total capital expenditures through the third quarter were approximately $3.7 million. We expect CapEx for the full year to be around $5 million to $8 million, largely spent on new innovative production equipment and automation. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, utilize leasing facilities, and make efficiency improvements to prepare for growth and add capacity. As we move further into fiscal 2026, we continue to face a lot of global economic uncertainties and volatile trade policies. Nevertheless, we are increasingly encouraged by the demand trends we're seeing as we enter the fourth quarter. Activity with several longstanding customers is improving, new programs are ramping, and our expanded U.S. and Vietnam capacity is generating increased customer interest. Our improved operating efficiency makes us more competitive, resulting in a stronger pipeline of potential new business, and we remain focused on further improving our profitability. Our production backlog has grown, and we believe that we are increasingly well positioned to win new programs and profitably expand our business. Due to the uncertainty of timing of new product ramps in light of continued macroeconomic uncertainty, we are not providing forward-looking guidance in the fourth quarter of fiscal year 2026. That's it for me. Brett? Brett Larsen: Thanks, Tony. Despite reduced demand from certain longstanding customers and the delays in production caused by winter storm Fern in the third quarter, we're encouraged by the improvements in our operating efficiencies and by the gradual rebound in demand from several longstanding customers and the continued growth of new programs that we're seeing in the fourth quarter. We continue to provide our customers with options to better manage macroeconomic uncertainties and enhance our potential for profitable long-term growth as we cease manufacturing operations in China, continue to right-size our Mexico facility, and build out new production capacity in the U.S. and Vietnam. Our improved operating efficiency has made us more competitive, and we expect our revenue to gradually begin to rebound and see a return to profitability in the fourth quarter of fiscal 2026. As part of our long-term strategy and in recognition of the continuing geopolitical tensions, tariff uncertainties, and increasing costs associated with China-based production, we are winding down our facilities there and transferring programs to Vietnam. We anticipate savings generated from the shutdown to approximate $1.2 million per quarter once fully executed. As part of our global sourcing strategy, we will, however, continue to operate in China with a small team focused on sourcing critical components locally. Over the past 24 months, we have also reduced our total head count by approximately 42% in Mexico and have begun transferring some programs from Mexico to the U.S. and Vietnam. Our Mexico facility continues to offer a unique solution for tariff mitigation under the existing USMCA tariff agreement. Given the sustained trend of continued wage increases in Mexico, we have streamlined our operations, increased efficiencies, and invested in automation to be more cost-competitive in the market. Due to the successful cost reduction and streamlining production processes, we have recently seen an increase in the quoting volume and probability of landing new programs manufactured in our Mexican facilities. We've also seen an influx of new customer visits and audits of our Juarez campus as of late that demonstrates we are competitive for a growing variety of quoting opportunities. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. We are very excited about the recent investments made in the U.S. and Vietnam to build out capacity and new capabilities to meet evolving customer demand. You will recall that we opened our new technology and resource and development location in Arkansas during the first quarter of fiscal 2026. Our U.S.-based production provides customers with outstanding flexibility, engineering support, and ease of communications. We expect double-digit growth in our facility in Arkansas during the upcoming fiscal year. You will also recall that we have recently doubled our manufacturing capacity in Vietnam that now has the capability to support anticipated future medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the U.S. and Vietnam will enable us to benefit from customer demand for rebalancing their contract manufacturing and mitigate the severe impact and uncertainty surrounding the tariffs on goods and critical components. By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our U.S. and Vietnam facilities. These initiatives reflect the longstanding customer trends, both to nearshore as well as derisk the potential adverse impact of tariff increases and geopolitical tensions. During the third quarter of fiscal 2026, we won new programs in automotive technology, industrial tooling, pest control, and industrial power management. Our improved operating efficiency has also made us more competitive, increasing our sales pipeline, particularly in such steady growth sectors as utilities and data center equipment. Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. In light of the significant transitions and streamlining initiatives we've made in the past 2 years, it's worth reviewing our key competitive advantages going forward. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. First, we've enhanced our cost and tariff efficiency and the flexibility of our global manufacturing footprint. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsource strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart, long-term strategy. Second, many of our manufacturing program wins are predicated upon Key Tronic's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of a program-specific design challenges make that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters. Third, we continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection blow, gas assist, multishot, as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors of a similar size. While the global market uncertainties have created some delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities. We're expecting revenue growth in the coming quarters from new programs launching in the U.S., Mexico, and Vietnam. Significant improvements in our operating efficiencies are creating a stronger pipeline of potential new business. Over the long term, we remain very encouraged by our cost reductions made over the past 2 years to become more market-competitive, our increasing cash flow generated from operations, enhanced global manufacturing footprint, and the innovations of our design engineering. All these initiatives have increased our potential for profitable growth. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions. Operator: [Operator Instructions] And we will take our first question from Matt Dhane with Tieton Capital Management. Matthew Dhane: I did want to ask, you referenced you had 4 wins in your press release. Just wanted to get a sense of the size of each of those wins, as well as where they're going to be -- where the manufacturing is going to be taking place, and then also expected timing of the ramps of those. Brett Larsen: You bet. Happy to do that, Matt. So I think the first one, that automotive technology, that's about a $3 million to $5 million program that's slated to start in Juarez in fiscal '27. My expectation is we'll probably start ramping that in the second quarter. Next is the industrial tooling. This one is a bit unique. It was a design program that we started here in Spokane. Now they're wanting us to actually start building some low-volume production. So we're actually going to do that in our downstairs facility here in Spokane temporarily while we ramp that. Currently, it has about an order of about $3 million, but we're expecting that to grow. Ramp on that is immediate. Third is pest control. That's a $2.5 million opportunity incremental to some other business of an existing customer down in Juarez, Mexico. And then the last -- fourth is the industrial power management. That's an $8 million to $10 million opportunity that will start towards the end of the calendar quarter, so again, second quarter of fiscal '27 in our Springdale, Arkansas facility. Matthew Dhane: One other question I did have. So obviously, tariffs has been a key conversation point here for a while. You talked about your pipeline building. What role is tariffs playing today in conversations with prospective customers? And yes, just help me understand all that, if you could. Brett Larsen: Yes. There's quite a bit of moving parts -- continue to be moving parts with -- related to tariffs. I think we're well situated now that we have an increased capacity to build product in Vietnam. The fact that USMCA is still in -- still a mitigation opportunity as well in Mexico and those that want to nearshore in the U.S. So I think we're seeing a hesitancy to make a decision or to award us a program. Some of that hesitancy is coming to close, and we're actually seeing the actual awarded opportunities begin to pile up. So I think this hesitancy and uncertainty for so long of awarding a program and elongating that sales cycle now begins to -- I think, people are becoming okay with the fact that there's going to be continued uncertainty, and we're actually seeing stocking levels decrease in certain key new opportunities and legacy customers. So I think it's a change in the market of, 'I'll wait and see what tariffs do,' to now, 'it's a complete, open -- continued changing in and out because of the required response -- or the required stockouts and reducing inventories, they're going to need to make a decision. And so, I'm making that in light of the uncertainty. That's a long-winded answer to, I think we anticipate some wins that we've been waiting for, for quite some time. Operator: [Operator Instructions] And we will take our next question from George Melas with MKH Management. George Melas: Nice to hear a consistent story about increased capability -- in the number and capability of design engineers. Can you elaborate a little bit on that? And is that still very much -- is design complexity very much one of the focus of your sales opportunities? Brett Larsen: Yes. As we spoke before, George, part of our strategy is to continue to grow that design capability. So we're continuing to recruit and hire new design engineers. We have found it incredibly important for us to continue down that path. If you get into a customer relationship where you're providing design capabilities to them, not only is that business very sticky, you're also helping them design the product to be a good fit to your own production equipment and capabilities within your own factory. So we're going to continue down that road. What's kind of fun to see is this is the first design project that we're actually building within our Spokane facility with the engineers themselves. This is a little new to us. We've done this many years back. But my expectation is that this may become a bit more of the norm, as we take over the design responsibility to bring a new product to market. And maybe they use our engineers to put the first series or set of products together. George Melas: That sounds good. Can you also give us a bit of an update on the data processing customer in Mississippi? I think that's a potentially very, very significant project, but I think it was always expected to ramp rather slowly or progressively. Can you update us on that? Brett Larsen: You bet, George. So that customer down in Mississippi continues to be flat quarter-over-quarter, so quarter 2 to quarter 3 is flat. Our hope is that, that will continue to ramp over time. But to date, it's been relatively flat over the last 2 quarters. There's not any real growth that we see in Q4, but maybe in fiscal '27. That's the consign program, I think, that we spoke about at length a couple of quarters ago. But it still continues to be a very good program for us. It's just -- it's been fairly flat last 2 quarters. George Melas: And at what level it is now in terms of what you think it could be? Is it at 1/4 of its potential? Or how would you characterize it compared to what the potential expectation is? Brett Larsen: That's a difficult one to quantify. I think we're probably 50% of what our initial expectation was. But I think this is very market sensitive and based off of where we're at today, again, that's a tough one. I wish I had a crystal ball, George, but we're definitely not where we thought its capacity was, but it's a complete unknown at this point. Anthony Voorhees: And I'd just add to that, George, that this customer has a number of SKUs that we could build. And we've actually built a few different SKUs for them already. So we're ready to take on more when it becomes available to us. Brett Larsen: Yes. The relationship is just very market sensitive. George Melas: And maybe just one clarification. You guys mentioned in your prepared remarks that you can see a return to profitability in the fourth quarter. So basically, it means next quarter. Brett Larsen: Yes. George Melas: What kind of revenue level do you need in order to hit that target? Brett Larsen: Yes, I don't know that we're yet giving guidance. Tony mentioned that there still is quite a bit of uncertainty in some ramps and the things that are going on. So I don't know that we want to quantify our revenue. Our expectation is definitely that there's going to be revenue growth Q4 sequentially from Q3. And we still feel strongly that we'll be in the black bottom line. In future quarters, we'll readdress that. But at this point, I'd rather not give guidance. George Melas: Okay. And then just a quick question. In the last quarter, you mentioned potential savings from China from stopping the -- closing the manufacturing operations there. And you also mentioned $1.5 million of savings related to the reduction in force in Mexico. Is that something that you've started to benefit from that has started to hit the bottom line? Or do we really see that in the fourth quarter or in fiscal '27? Anthony Voorhees: Yes. Thanks, George, for that question. So in China, specifically, we have completed our manufacturing operations there. So now we have a bit additional work to do just to get other materials and equipment out of China that we want to send to one of our other locations or sell it. So we do have a bit of work to do there. We completed that production in April, so just not that long ago. So we should start to see those employees severanced now, and we'll start to see improvements related to the $1.2 million that we mentioned in the script, probably in later this quarter. Brett Larsen: Yes. So I think the full $1.2 million won't be until Q1. But there is some incremental savings in this quarter, Q4, that we will see. Anthony Voorhees: And with regard to the Juarez, Mexico question, we have completed that severance. We are seeing some revenue growth down there in our Mexico operations. So we didn't complete 100% of that severance, as we will need some of those employees as we're seeing some revenue growth there in that facility. Operator: [Operator Instructions] And at this time, we have no further questions. I would now like to turn the call back to Brett Larsen. Brett Larsen: Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thank you. Operator: This does conclude today's call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to PennyMac Financial Services, Inc.'s First Quarter 2026 Earnings Call. Additional earnings materials, including presentation slides that will be referred to in this call as well as an Excel file with supplemental information are available on PennyMac Financial's website at pfsi.pennymac.com. Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on Slide 2 of the earnings presentation that could cause the company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Financial's Chief Financial Officer. David Spector: Thank you, operator. Good afternoon, and thank you to everyone for participating in our first quarter 2026 earnings call. As shown on Slide 3, PennyMac Financial generated net income of $82 million in the first quarter or $1.53 in earnings per diluted share or an 8% annualized return on equity. Excluding the impact of valuation-related changes and transaction expenses related to our acquisition of Cenlar's subservicing business, adjusted EPS was $2.19 per diluted share or an 11% annualized adjusted return on equity. As Dan will expand upon, we continue to optimize our hedging strategies to converge GAAP and adjusted ROEs. While our adjusted return on equity this quarter remained below our longer-term expectations, we remain intensely focused on maximizing returns on invested capital over the near and long term. I am also optimistic regarding the underlying trends in our business, particularly higher recapture rates in consumer direct channel, coupled with increasing revenue per loan. In addition to these positive trends, I will also address initiatives we currently have underway later in this call. Our optimism is most evident in the production segment, where we are strategically growing in areas that will optimize returns on capital in what remains a dynamic and fragmented market. Specifically in the correspondent channel, we are leveraging our leadership position to exercise rigorous pricing discipline on the related MSRs while driving an increase in margins across various products. This pricing discipline, combined with continued growth in our consumer and broker direct channels led to production segment generating its highest level of pretax income in nearly 5 years. In addition, we have 3 distinct production channels: correspondent, broker direct and consumer direct, all of which are operating at significant scale. This diversified platform provides us with multiple complementary avenues for sustainable growth and a unique ability to shift our focus and resources to the channel that offers the most attractive risk-adjusted returns. Turning to Slide 4. Let's review a few additional business updates. During the quarter, we repurchased 560,000 shares or 1% of our outstanding stock for $50 million at a weighted average price of $89.28 per share as we saw tremendous value in the stock at these price levels. I am also pleased to report that we remain on track to close the acquisition of Cenlar's subservicing business in the second half of the year. Our teams are collaborating effectively to ensure a seamless integration of Cenlar's subservicing business into our operations. As outlined in our investor update presentation in February, once fully integrated, we expect strong returns from this acquisition, and we are excited about the increase in scale and diversification that this transaction will provide. Turning to our consumer direct origination channel. The deployment of Vesta has been complete for new loan originations and has begun to drive operating efficiencies through the introduction of AI agents and the resulting reduction in previously manual tasks. On recapture, I am also pleased with the meaningful progress we have already achieved with consumer direct origination volumes up meaningfully from recent periods and conventional first lien refinance recapture rates up 5 percentage points from the prior quarter to 22%. This momentum has continued into the second quarter with conventional first lien refinance recapture rates running near 30% in the month of April. Turning to Slide 6. Our mortgage banking operating pretax income was $190 million for the quarter, up from $173 million in the fourth quarter. As we look ahead, we expect adjusted ROEs to remain near current levels in the second quarter before increasing to the low to mid-teens in the second half of 2026 as we realize the benefits of technology and efficiency enhancements. As just mentioned, we have lowered our ROE guidance from the mid- to high teens to low to mid-teens in the second half of the year due to 2 main factors. First, we have decided to meaningfully accelerate our technology investments to drive significant operational efficiencies in both production and servicing. And second, we expect less origination demand with interest rates at current levels. Over the medium to long term, we continue to expect PFSI to achieve ROEs in the high teens to low 20% range, which we expect to achieve through the realization of these technology investments and increasing scale. On Slide 7, we highlight the future opportunity within our consumer direct channel when rates do decline as well as our first lien refinance recapture rates over the 5 most recent quarters. As of March 31, we serviced a combined $320 billion in UPB of loans with note rates above 5%, of which more than half had note rates above 6%. As you can see on the charts in the middle of the page, government refinance originations from our portfolio in the consumer direct channel are nearly double first quarter 2025 loans and our first lien refinance recapture rates remain strong in the 50% range. We are seeing even more success in conventional loans, where volumes are up more than fivefold from levels reported in the first quarter of 2025, driven by the previously noted improvement in first lien recapture rates to 22% from 17% in the prior quarter. And as I mentioned earlier, in April, we achieved conventional first lien refinance recapture rates of nearly 30%. We also completed the transition to Vesta, our new consumer direct loan origination system during the first quarter, and we are in the process of working through the pipeline of loans originated on the old system, which we expect to have completed in the second quarter. This new system has already substantially improved the customer experience. I am very pleased with these initial results and expect to realize material benefits of our new platform in the second half of this year. The early success we are seeing is a direct byproduct of our ability to reduce cost per loan and the days to close as well as leverage real-time data to engage borrowers more effectively. We have also started the successful release of AI agents within our fulfillment process across multiple products. We are rapidly moving towards a model with exceptionally low manual intervention and in some cases, we will have removed human touch points entirely, thereby improving the customer experience, further increasing recapture rates and driving higher operating margins. Furthermore, we are focused on the implementation of additional specific tech-enabled solutions, ranging from AI-driven lead prioritization to enhanced digital self-service. Turning to Slide 8. You can see how our state-of-the-art technology platform is driving significant operating leverage and superior unit economics across the entire enterprise. By combining our technology foundation with our scale advantages, we are driving unit costs to historic lows. As noted on the chart, our direct expenses within the consumer direct channel dropped 26% compared to 2022 levels. Similarly, in our servicing segment, our operating expenses as a percentage of total servicing UPB have dropped 24% to 4.5 basis points as we continued to enhance workforce productivity and automate complex tasks through the deployment of sophisticated technology. In our corporate and other segment, we are clearly achieving more results. By leaning into a unified technology foundation, we have reduced compensation as a percentage of adjusted revenue to 3.7% from 6.5% in 2022, a decrease of 44%. While these results are compelling, we are in a new stage of transformation and AI implementation with significant runway ahead to further optimize our platform, reduce unit costs and capture additional economies of scale. By combining our pricing and capital allocation disciplines with a best-in-class technology infrastructure that is already delivering record low unit costs, we are building a more resilient and profitable enterprise. We have the team, the technology and the scale necessary to drive toward our long-term target of high teens to low 20% ROEs. I will now turn it over to Dan, who will review the drivers of PFSI's first quarter financial performance. Daniel Perotti: Thank you, David. PFSI reported net income of $82 million in the first quarter or $1.53 in earnings per share for an annualized ROE of 8%. Adjusted net income was $118 million or $2.19 in adjusted earnings per share for an annualized adjusted ROE of 11%. The $0.66 difference between our GAAP and adjusted EPS was driven by 2 items. First, $44 million of fair value declines on MSRs net of hedges and costs. This includes principal-only stripped MBS valuation-related accretion changes and provision for losses on active loans. And second, $3 million of expenses related to our acquisition of Cenlar. PFSI's Board of Directors declared a first quarter common share dividend of $0.30 per share. And as David mentioned, we repurchased 560,000 shares of common stock for $50 million. On Slides 10 and 11, beginning with our production segment, pretax income was $134 million, more than double from the same quarter a year ago and up 5% from the prior quarter. As David mentioned, the increase from the prior quarter was driven primarily by strong execution in consumer and broker direct, which combined represented 75% of PFSI's account revenues. Total acquisition and origination volumes were $37 billion in unpaid principal balance, down 12% from the prior quarter. Of this, $34 billion was for PFSI's own accounts and $3 billion was fee-based fulfillment activity for PMT. Total lock volumes were $44 billion in UPB, down 4% from the prior quarter. PennyMac maintained its leading position in correspondent lending. Correspondent acquisitions were $24 billion in the first quarter, down 20% from the prior quarter. While our platform continues to drive profitable and sustainable growth, we are refining our production mix to better withstand market volatility and maximize the long-term value of our servicing portfolio. Correspondent channel margins were 28 basis points, up from 25 basis points in the prior quarter due to a shift in mix towards higher-margin government loans given the increased levels of competition from the GSE cash window, combined with a meaningful increase in average revenue per loan. Under its fulfillment agreement, PMT retains the right to purchase all nongovernment correspondent loan production from PFSI. In the first quarter, PMT purchased 18% of total conventional conforming correspondent production and 100% of nonconforming correspondent production, both percentages essentially unchanged from the prior quarter. In broker direct, we continued to see momentum as we position PennyMac as a strong alternative to channel leaders. Originations were up 3% and locks were up 26% from the prior quarter. The number of brokers approved to do business with us continues to grow, up 12% from the same time a year ago, reflecting the growing number of brokers who are increasingly leveraging our distinct value proposition. The revenue contribution from broker direct was up from the prior quarter due to higher volumes. Though margins were down slightly, revenue per loan increased, reflecting an increase in our average loan balances. Additionally, we recently launched the non-QM product within our broker direct channel and are already seeing strong initial take-up and positive traction from our broker partners as they leverage our expanded product suite. Lots of non-QM loans in our broker channel were $151 million in UPB during the first quarter, and momentum continued in April with $157 million in UPB of blocks. In consumer direct, volumes were up with originations up 15% and locked up 24% from the prior quarter, driving revenue contribution 30% higher than in the prior quarter. While margins were down slightly, revenue per loan increased sequentially across our conventional jumbo and closed-end second products, indicating higher average loan balances for those loan types. Post-lock activities across the channels contributed $13 million to pretax income, down from $34 million in the prior quarter, which benefited from strong secondary market execution relative to initial pricing. Production expenses net of loan origination expense increased 11% from the prior quarter due to higher volumes in direct lending. Turning to servicing on Slides 12 and 13. Our total servicing portfolio UPB ended the quarter at $720 billion, down only 2% from the prior quarter end despite runoff in MSR sales, which were largely mitigated by additions from new production. The servicing segment recorded pretax income of $13 million. Excluding valuation-related changes, pretax income was $57 million or 3.1 basis points of average servicing portfolio UPB, up from $45 million or 2.5 basis points in the prior quarter. Earnings from custodial balances were down from the prior quarter, primarily due to lower short-term interest rates. Though realized prepayment fees increased slightly from the prior quarter, realization of MSR cash flows was down 7% due to the expectation of lower prepayment fees in future periods resulting from portfolio burnout. Operating expenses remained low at 4.5 basis points of average servicing portfolio UPB or $81 million in the quarter. EBO revenue increased due to higher initiation of modifications and redelivery margins as a result of lower rates in the beginning of the quarter. Including the provision for losses on active loans, the fair value of PFSI's MSR increased by $177 million. An increase of $201 million was due to changes in market interest rates and was partially offset by $24 million in declines from other model and performance-related impacts. Hedge fair value losses, including principal-only stripped MBS valuation-related accretion changes and hedge costs were $221 million. As we talked about last quarter, we increased our hedge ratio to near 100% to proactively manage prepayment risk. While agency MBS spread volatility and tightening of the primary/secondary spread drove a net fair value decline this quarter, our positioning reflects our disciplined approach to maintaining book value stability across a volatile interest rate environment. Corporate and other items recorded a pretax loss of $42 million, up from $30 million in the prior quarter, primarily driven by $9 million in marketing activations related to the Olympic and Paralympic Winter Games, which are not expected to recur in upcoming quarters as well as $3 million of transaction expenses related to our acquisition of Cenlar's subservicing business. The prior quarter also included reduced expenses related to technology accruals. PFSI recorded a provision for tax expense of $22 million, resulting in an effective tax rate of 21.4%. Total debt to equity at quarter end was 4x and nonfunding debt to equity at the end of the quarter was 1.7x. The increase in total leverage was driven by higher direct lending production and the increase in nonfunding leverage was driven by higher interest rates, which drove increased utilization for our MSR credit facilities in addition to share repurchases. We expect these leverage ratios to remain near these levels as interest rates remain at current levels. Finally, we ended the quarter with $4.2 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged. We'll now open it up for questions. Operator? Operator: I would like to remind everyone we will only take questions related to PennyMac Financial Services, Inc. or PFSI. [Operator Instructions] Our first question comes from the line of Doug Harter with BTIG. Douglas Harter: Hoping you could talk about any impact the volatility had on revenue margins in the quarter whether it was increased hedging costs or less effective execution. David Spector: Congrats on the new role. Douglas Harter: Thank you, David. David Spector: So on the production side, I am really encouraged by what I saw take place in the first quarter. On the correspondent side, we saw margins up quarter-over-quarter from the fourth quarter, and we're seeing a continuation of that as we start the second quarter. In GPO, we're seeing margins currently holding near to the levels we saw in the first quarter. They're actually up a bit, and they're up from the fourth quarter. In our consumer direct channel we're seeing a consistent margin story there, while the mix is going to -- the mix in the second quarter will probably warrant a higher margin of course. But I'll tell you that just the focus that we're seeing in the company in driving up the revenue per loan is really showing in our results that we saw in Q1. It's going to continue to be a focus of the company. On the hedge side, Dan, do you want to answer on the hedge side? Daniel Perotti: Sure. With respect to hedging, as we talked about in the call there was a fair amount of interest rate volatility during the first quarter as you saw in terms of the results and how we laid it out. We think we navigated that volatility well overall with respect to our rate impacts, fairly minimal impact, just $7 million difference between the MSR and hedge versus our rate impacts. Hedge costs, we did see as a little bit elevated, particularly related to the increase in volatility toward the end of the quarter, drove up our hedge costs in March, and that contributed the majority of the hedge costs that we saw, the $14 million in hedge costs that we saw during the quarter. But overall, pleased with our results and our navigation through what was a fairly volatile period in terms of interest rates during Q1. Operator: Your next question comes from Kyle Joseph with Stephens. Kyle Joseph: I guess, yes, as it pertains to hedging, I'd start, and I did hear the operator's warning, but just pending the acquisition how are you thinking about balancing hedging with how the business looks on a pro forma basis? Like, any changes we should expect there? Daniel Perotti: No real changes expected to our hedging strategy as we get through the acquisition. Just to refresh, the business that we're acquiring from Cenlar, their subservicing business is not the MSRs. They have -- it's really a fee-for-service business and so equity light. They don't have any MSRs in particular to speak of. And so our overall strategy in terms of hedging the MSR, we expect to be consistent with how we've operated to date and not really change with respect to the additional subservicing business that we're bringing on. Kyle Joseph: Got it. And then just to follow up, just been getting more and more questions on the Homebuyers Privacy Protection Act and how you're thinking about any potential changes to position the business to best address that? David Spector: Are you referring to the trigger leads, Kyle? Kyle Joseph: Yes. Exactly. Yes. David Spector: Yes. It's really early. The law went into effect on March 5, and we're just starting to see loans come through that funded that locked at or after that date. We'll have a much better look through in the second quarter. But from the little that we've seen, it's generally positive. Operator: Your next question comes from the line of Bose George with [ KBW ]. Bose George: Actually, just in terms of your guidance, it looks like you removed the high teens part of the guidance. Now it seems like it's the mid-teens. Is that a reflection of the smaller -- the mortgage market that's expected this year with the move up in rates? David Spector: We are -- I will tell you, I've not removed the high teens from the long-term ROE guidance of this company. We believe we're a high teens to low 20% ROE company. In the short to medium term, there's really 2 factors that led us to just kind of slow down the return to the historic levels that we've seen. One is the technology spend, and we are investing across -- both across our production channel and our servicing channel. On the production side we've deployed our new technology into our consumer direct channel. And now we are very busy introducing and implementing AI agents to help reduce not only the cost to fulfill, but also to continue to grow the efficiencies that we're seeing on Vesta for our sales associates. And so based on the early results that we're seeing from both, we feel it's incumbent upon us to really move quickly to take humans out of the loop and to be able to close loans faster and cheaper. And so that's going to lead to just growing scale within our consumer direct platform. Similarly based on the results we're seeing in our consumer direct channel, we are moving quickly to move our broker direct channel onto the same platform. There's work that needs to be done to be able to build a broker portal that is very similar in experience and feel to the portal that our brokers experience today. And so that work will be done in the second and third quarters. We expect to see the first broker loans coming on at the end of the year with the full migration taking place in 2027. But the exciting part about the move in broker is that the work we're doing on AI agents for our consumer direct channel are very relevant for our broker partners. And so I feel it's incumbent upon us to deliver the same experience for our brokers that we're seeing within our consumer direct channel. Similarly, on the consumer direct channel, we're doing work to create a human-out-of-the-loop mortgage origination process that I'm excited about that I'm hopeful -- not hopeful, I know we'll see in the second half of this year. And then we're always looking to reduce costs in our correspondent channel and our shared service groups. But other than the technology shared service groups, the cost -- the technology costs with those are pretty minimal with what I'm seeing out of Gemini and Claude and the add-ins that they have to Excel, there's a lot of great work being done around the organization. On the servicing side, there's similar work we're doing to drive down the cost to service., okay? And we have a long term -- not long term, a medium-term goal to bring that cost down to $55 a loan a year. It's what we call the drive to $55. And we believe we can get there in 24 to 36 months. And so the benefit there is not only to our own servicing portfolio, but as we add capacity and scale to our servicing platform, we're going to get the benefits with the Cenlar loans. And so it's just -- it's a lot of good exciting investment that I expect is going to really deliver returns starting in the second half of this year, but into '27 and '28. And I feel it's incumbent upon us to make these investments to continue to retain our competitive advantage in the industry and hopefully widen the moat. On the origination side, I think to the point you raised there the Fannie MBA average for 2026 is at $2.3 trillion. But given where we're seeing rates today and given where it looks like they're going to be for the future, I suspect and I believe they will be lower. And so that will lead to lower production volumes. Some of that will be offset by lower amortization on the portfolio. But I think given the results we're seeing out of our production units, when rates do decline, I expect to see very good recapture coming out of our consumer direct channel. I expect to see broker direct continue to grow share while growing revenues. And in our correspondent channel, they had a great first quarter. And when you consider with the GSEs being more aggressive through the cash window and conventional, they really did a nice job at increasing margins, increasing revenue per loan, maintaining the leadership in the correspondent channel and I would expect that to continue for 2026. Bose George: Okay. Great. That's great color. And just a quick follow-up. The mix in the -- the product mix, just given what you noted in terms of the GSEs continuing to be competitive, do you feel like the mix is going to be similar where there's -- you're leaning more into the broker and direct-to-consumer? David Spector: I think, look, we lean into all 3 channels, but we do so to do it profitably, okay? We -- I often tell people around here since 2023, we, as an industry, have underexecuted to our cost of capital. And we, as an industry, have to make our cost of capital. We have to do what we need to do to increase margins, increase our returns and to do so without being concerned about market share or being concerned about what the GSEs are doing. Obviously, market share leads to scale and it's something -- is a byproduct of our leadership position. But I think that suffice it to say that what we're seeing in broker direct and consumer direct and with that representing 75% of our loan production in Q1, I would expect to see something similar in Q2 for sure, and then we'll see what happens after that. Operator: Your next question comes from the line of Mark DeVries with Deutsche Bank. Mark DeVries: David, I was wondering if you could help us understand on that revised ROE guidance for the end of the year, kind of the high teens going down to the maybe low to mid-teens. How much of that is that pulling forward of the investment in technology versus just kind of the smaller market size? David Spector: I would say it's about 2/3 technology, 1/3 smaller origination market. I think that the returns we're seeing from the investment are really compelling. And so I think that to wait to invest one versus the other, I don't think -- it doesn't warrant waiting given the returns. And so I think that we feel very strongly and convicted that we want -- that we're going to make the investment. And I think, as I said, we'll see tech at near peak levels. And believe me, starting in the second half of this year, we're going to see the returns from this spend as well as the decline of technology spend over the following 12 to 18 months. I know many people say tech spend doesn't go down, but we reduced our tech spend from '22 to '24, and we will reduce it here as we deploy the finite amount of AI agents that we need to in our production and servicing divisions. Mark DeVries: Okay. That's helpful context. And that may help answer the second part of my question. But when I just look back to -- excluding the last 2 quarters, the annualized operating ROE had been kind of more like the mid- to high teens, and we're kind of guiding even in the back half of the year to kind of below that. Is that -- is kind of -- despite the market size, it probably wasn't any bigger then than what we're projecting now. Is this just kind of a -- given this -- maybe this investment imperative in tech, we're looking at some intermediate term lower ROEs as you make these kind of essential investments with hopefully a much more significant longer-term payoffs? David Spector: I think that's right. Look, I'm always going to present to you what we think is the base case. Everyone on this call knows me well enough that if we can deliver the results faster, we're going to, and you'll see the results sooner. But I think it's going to be, as I said, in the second half of '26, we'll begin to see the results. And I think we will get into that mid- to high teens in the back half -- I'm sorry, the mid-teens in the back half of the year. But I just think that we want to be very enthusiastic about the technology investments that we're making here. They're very meaningful. And that's something that we want to see implemented, given the fact that we work in a competitive environment and others are doing similar. I think we're ahead of most, if not all of them. And I think it's something that we want to continue to maintain our competitive advantage. Operator: Your next question comes from Don Fandetti with Wells Fargo. Donald Fandetti: Yes, David, I guess you talked a lot about the ROE and tech investments. I mean, if you look at the industry, there are some large players, a lot of investment going on. Like, what gives you the confidence that this is sort of a 4-quarter kind of situation? Why not take that longer-term ROE down? And I guess this incremental spend, it sounds like it's more offensive. I guess you've had some good improvement, looking at the conventional loan, consumer direct recapture up to almost 30%. Like, is this offensive or defensive type incremental investment? David Spector: I believe it's offensive, Don. And I'll tell you, where we get our confidence from is first, if you just started servicing and what we've done with our servicing technology and driving down our cost to service to industry-leading lows, and I'm not talking by a few dollars here, I'm talking by a lot, and our ability to be able to serve our customers and be able to react to market anomalies. And what we've done in servicing gives me great confidence that we have the culture to be able to identify what the business opportunities and needs are and the technology leadership to be able to deliver those on a low-cost basis. Similarly, with AI, what we're seeing is a lot of ability for our business leaders to take ownership and control of developing and building and implementing the AI agents. And they have a staff in place that requires augmentation by moving people out of technology into the business units to build those agents. Now over time, the demand for the agents and the other AI tools is going to lessen. But I believe our business leaders who are -- who have been very tech-focused since we started the company understand what needs to be done. And so that's a factor in my decision-making here. And then finally, with what I'm seeing on Vesta in the platform and the way it's built and the ease to which we can deploy the agents into our workflow is very meaningful. And that's work that is -- that has to be done by the team here as well. And so I just -- I generally believe that we're at a point in the market where we have to go on offense. And we're going to do it as we always do. We're rows and columns folks. We're going to do it responsibly. We're watching the investment. But as I said, I believe we're at or near peak levels. And given with what I'm seeing in the revenue per loan increasing, gives me great confidence in terms of our ability to pay for some of it. But also what I really expect to see in terms of the cost reduction is going to be very meaningful. Operator: Your next question comes from the line of Trevor Cranston with Citizens JMP. Trevor Cranston: A bit of a follow-up on that last question. When you think about companies across the industry investing pretty aggressively in AI and new tech with the goal of making it cheaper to originate loans and faster, how do you guys think about the long-term impact of that in terms of -- do you think that ends up resulting in companies just sort of structurally competing down gain on sale margins to a lower level than they've been historically? I'm curious kind of how you guys think about that dynamic when you think about kind of the long-term ROE guidance for the company. David Spector: Look, I think that we have to compete based on cost to originate and ultimately on price, especially in our consumer direct channel. I think on broker direct I think that if you look at what's taken place in the marketplace and you look at the Q1 results we didn't see the perhaps margin expansion that others may have expected to see. But at the same time, I think that we're investing in AI because we believe here at the company that to increase the profitability and to consistently get to ROEs above 20%, we have to be the low-cost provider. And to be the low-cost provider, we have to make the investments in technology to reduce the cost to originate and also to reduce the days to close. And as an industry, we haven't seen as much movement on that as well. And so I just think that we're going to be competing on -- whether you want to call it gain on sale margins or net margins, we're going to be competing on profitability. But that profitability is going to be more heavily weighted to what the cost is to produce the mortgage and how quickly can you close the loan, especially on the refinance. And so that's where I see really the industry headed. And I think we're just in a really unique position to be able to be a first mover on this, just given the fact that we have scale in all 3 channels, and we can quickly deploy technologies we created and to see meaningful results. Operator: [Operator Instructions] Our next question comes from Shanna Qiu with Barclays. Gengxuan Qiu: Leverage is at 1.7x, which I think is above historical target of 1.5x. I know you mentioned that your ROE guide is somewhat predicated on the 2/3 technology and 1/3 smaller market. How should we think about where you guys would let leverage run to as you're making these investments if we do perhaps see a smaller market than you currently are anticipating? Daniel Perotti: Overall, we're very focused on leverage. As going back historically, we've maintained our leverage at very responsible levels. And the 1.7x, as you mentioned, is a bit above our historical target or historical run rate. We -- as we talked about in the earnings deck, we do expect to maintain our leverage at these levels. We are very focused on maintaining prudent levels of leverage in the business and we do have the ability to adjust and reallocate our capital in order to maintain our leverage ratios as we've shown in the past few quarters around optimizing our MSR portfolio and selling certain portfolios to ensure that we stay within leverage bound. And so despite the increases or the -- our -- what we projected for leverage or what we put out as our projection for leverage at the 1.7x contemplates the increase or the elevated technology spend that David went through. And it's also contemplating the lower levels of activity with the smaller market. So it contemplates both of those factors already. But it is an element in our capital structure and maintaining prudent levels of leverage is something that we are very focused on and will continue to maintain in the business. David Spector: I'm focused on this every day. And I think we're at the -- I know we're at the upper bounds of where we're comfortable running the company. And so we're going to do what we need to do to try to get that down more towards the historic levels that we've seen in the company. Gengxuan Qiu: Great. And then just a follow-up on the accounting. Can you comment on kind of what drove the changes in the breakout of the principal-only stripped MBS valuation related to accretion? I don't believe that was in prior quarters. So any comments on that? Daniel Perotti: Sure. That -- we did make a change there or shift some of that geography, and that really relates to the placement of some of the impacts to accounting from the principal-only bonds versus changes in value during the period. So not to get too far into the details, but a piece of the principal-only bonds change in value is captured in the changes in cash flows relating to interest rates is captured in interest income with changes in accretion. If you look in our 10-Q for this quarter, which was released this afternoon, you can see there was actually a negative impact to interest income due to basically changes in projected cash flows and sort of a reversal of the accretion. Those changes in accretion relating to future projected cash flows and the projected life of the bonds, we really view as being associated with changes in fair value during the period due to changes in interest rates, which obviously is also what impacts MSR fair value. The change is typically, if you look at the past couple of quarters that are presented there on Page 13 of the earnings deck has typically been fairly small. But given the change in the volatility of interest rates during the quarter, and some of the sell-off, it was a bit larger this quarter, and we thought that it made sense and was more appropriate to present associated with changes in fair value of the MSR as opposed to -- and it is noncash and based on future expected projected cash flows as opposed to in the pretax income, excluding the valuation-related changes. And so we've made that change for this period and going back historically. Operator: We have no further questions at this time. I'll now turn it back to David Spector for closing remarks. David Spector: Well, I want to thank everyone for joining us on the call today, and thank you for taking the time to ask your thoughtful questions. If you have any follow-up questions, I can make myself available, IR is available, and I look forward to ongoing results and good discussions taking place. Thank you very much. Operator: That concludes today's call. You may now disconnect.
Operator: Good day, and welcome to the DHI Group, Inc. First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Todd Kehrli of PondelWilkinson. Please go ahead. Todd Kehrli: Thank you, operator. Good afternoon, and welcome to DHI Group's first quarter earnings conference call for 2026. Joining me today are DHI's CEO, Art Zeile; and CFO, Greg Schippers. Before I hand the call over to Art, I'd like to address a few quick items. This afternoon, DHI issued a press release announcing its financial results for the first quarter of 2026. The release is available on the company's website at dhigroupinc.com and this call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website. I want to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical information, statements on today's call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect DHI management's current views concerning future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include the risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. DHI undertakes no obligation to update or revise any forward-looking statements. Lastly, on today's call, management will reference specific financial measures, including adjusted EBITDA, adjusted EBITDA margin, free cash flow and non-GAAP earnings per share, which are not prepared in accordance with U.S. GAAP. Information regarding those non-GAAP measures and reconciliations to the most directly comparable GAAP measures are available in our earnings press release, which can be found on our website at dhigroupinc.com in the Investor Relations section. With that, I'll now turn the conference over to Art Zeile, CEO of DHI Group. Art Zeile: Thank you, Todd, and good afternoon, everyone. We appreciate you joining us today. At DHI, our mission is simple. We help employers connect with highly skilled technology professionals through 2 platforms, ClearanceJobs and Dice, both of which serve critical roles in the tech hiring ecosystem. Our exclusive focus on tech occupations, combined with ongoing product innovation gives us a durable competitive advantage. Today, approximately 6,000 employers and staffing and recruiting companies subscribe to our platforms and approximately 90% of our revenue is recurring. ClearanceJobs is the leading marketplace for professionals with active U.S. security clearances, serving approximately 1,700 customers, including Lockheed, Booz Allen Hamilton, Leidos, Raytheon and many others. With 2 million candidates on our platform, we have the largest number of profiles of U.S. cleared professionals, giving CJ a significant competitive advantage as a platform for hiring cleared tech talent for the defense sector. Dice is essentially LinkedIn for tech hiring, built over 35 years with 7.8 million profiles in our database, representing the vast majority of technology professionals in the United States. While LinkedIn emphasizes a person's title, we focus on tech skills, of which there are over 100,000 distinct skills in our data model. Tech professionals on Dice actively update their profiles with new skills, making Dice the most relevant platform for recruiters who need to source tech talent. With these 2 platforms, we have become an essential software tool used by employers and recruiters to find top tech talent for their open positions. This quarter reflects a company executing well against a clear strategy with strong momentum in ClearanceJobs and encouragingly early progress across our strategic initiatives. Let me start with ClearanceJobs, which remains the primary growth engine of DHI Group. In the first quarter, we achieved revenue growth of 5% and bookings growth of 7% year-over-year. Additionally, CJ delivered an adjusted EBITDA margin of 40%. This underscores the strength of the underlying business and improving demand trends. We are also seeing a more positive market environment following the passage of the U.S. defense budget in late January. While there is typically a lag between budget approval and hiring activity, customer sentiment has improved significantly and we are beginning to see that reflected in stronger engagement and demand. The $1 trillion U.S. defense budget for fiscal year 2026 represents a substantial 1-year increase over the previous year's budget. Additionally, NATO countries are increasing their defense budgets, aiming to allocate 5% of GDP, which could lead to more than $500 billion in additional spending annually with U.S. contractors likely to receive a substantial share of this expenditure. These dynamics are promising for ClearanceJobs. With over 10,000 employers of cleared tech professionals and more than 100 government agencies in need of them, CJ has a significant growth opportunity as government contractors look to staff new projects. We believe we are in the early stages of this growth cycle. Consistent with CJ's expand the mission strategy, we acquired Point Solutions Group, or PSG, inside the quarter and are encouraged by the early results. In a short period, we have increased the number of contractors deployed and grown the number of active contracts with major prime contractors. We are also seeing strong engagement from those partners as we develop and deepen relationships and pursue additional opportunities. While still early, the initial performance supports our strategy to expand the ClearanceJobs platform into adjacent high-value services and further monetize the relationships we have built over the past 24 years. Our AgileATS business also continues to make steady progress. While still modest in scale, we are consistently adding customers and increasing sales investment to support future growth. We are also seeing early traction with our premium candidate subscription on ClearanceJobs. Since its formal launch in mid-February, adoption has surpassed expectations with quick growth in paid subscribers. Although the immediate revenue impact is modest, this is an important new long-term monetization opportunity. Stepping back, our strategy is clear. We are leveraging the strength of the ClearanceJobs platform and our long-standing relationships with top government contractors to grow into related services and talent acquisition and management. This platform-driven approach positions us for sustained long-term growth. Turning to Dice. We are in the beginning -- we are beginning to see the signs of stabilization in the tech hiring market. As CompTIA stated in its report on the month of March, companies are beginning to move away from the more conservative approaches of the past year and are considering investments in talent to support strategic digital initiatives. Leading indicators, including job postings and customer activity are improving, and we are seeing increased engagement from both staffing firms and commercial customers. There were more than 537,000 job postings for tech positions in March, including 254,000 new postings, an increase of 19% year-over-year. While we are not yet seeing a recovery in Dice bookings, the trend lines are encouraging. AI continues to be the most important long-term driver. As of March 2026, 67% or 2/3 of U.S. tech job postings required AI-related skills, more than double the 29% we saw a year ago. Over that same period, job postings requiring machine learning skills have increased 167%. We view this as a powerful validation of our strategy. Rather than reducing the need for talent, AI is increasing demand for highly skilled technical professionals. Dice is well positioned here with a deep skills-based model that allows employers to identify candidates based on more than 360 distinct AI-related skills. Rather than treating AI as a single generic category, Dice enables employers to identify and match candidates based on specific skill sets, an increasingly critical capability as AI roles become more specialized. We have also made it easier for candidates to access Dice job postings by being the first career platform with a Claude connector. This is only one of many Dice features that implement an AI model solution. As you recall, we enabled 2 self-service options for Dice late last year and we are already seeing a steady progression of transactions as we ramp our marketing campaign spend. While near-term performance will depend on the pace of recovery in the broader tech hiring market, we believe Dice is strategically well positioned, especially as demand for AI-related skills continues to grow. From a financial perspective, DHI continues to generate strong free cash flow, supported by our subscription model and disciplined cost structure. This allows us to take a balanced approach to capital allocation, investing in growth initiatives, pursuing strategic acquisitions and returning capital to shareholders through an active share repurchase program. As a reminder, our Board approved a $10 million share repurchase program in the first quarter, demonstrating our confidence in the company's long-term value. In summary, we believe DHI is uniquely positioned at the intersection of 2 powerful and durable trends; increasing global defense spending and growing demand for highly specialized technology talent, particularly in AI. ClearanceJobs continues to demonstrate strong growth and expanding opportunity as government and contractor demand accelerates, while Dice is well positioned to benefit from an eventual recovery in tech hiring, supported by our differentiated skills-based approach and continued product innovation. At the same time, we are successfully extending our platforms into adjacent services, creating new monetization opportunities and deepening our relationships with customers. Importantly, our highly recurring revenue model and strong free cash flow give us the flexibility to invest for growth while continuing to return capital to shareholders. Taken together, we believe we are building a more durable, high-growth business with multiple levers for value creation. With that, I'll turn the call over to Greg to walk you through the financial results in more detail. Greg Schippers: Thank you, Art, and good afternoon, everyone. I'll start with a brief overview of our first quarter results before walking through each of the segments in more detail. While total revenue and bookings declined year-over-year, our results reflect the continued strength of ClearanceJobs, which delivered both revenue and bookings growth as well as the benefits of the actions we've taken to improve efficiency across the business. Importantly, we delivered solid adjusted EBITDA growth and margin expansion in the quarter, along with strong free cash flow generation. Overall, our performance highlights the durability of our subscription-based model, the growth opportunity in ClearanceJobs and the significantly improved profitability we are seeing in Dice as we position the business for an eventual recovery. With that context, let's turn to our segment performance, starting with ClearanceJobs. ClearanceJobs revenue was $14.0 million, up 5% year-over-year and roughly flat compared to the prior quarter. Bookings for CJ were $18.0 million, up 7% year-over-year. PSG acquired at the end of February, contributed $700,000 of revenue and bookings in the quarter for CJ. We ended the first quarter with 1,741 CJ recruitment package customers, which was down 8% on a year-over-year basis and down 2% on a sequential basis. CJ accounts spending greater than $15,000 in annual recurring revenue increased versus the prior year. Our average annual revenue per CJ recruitment package customer was up 6% year-over-year and roughly flat on a sequential basis to $27,286. Approximately 90% of CJ revenue is recurring and comes from annual or multiyear contracts. For the quarter, CJ's revenue renewal rate was 88% and CJ's retention rate was 105%. The revenue renewal rate was negatively impacted by a customer with annual spend over $500,000 that did not renew in the quarter, but is expected to return later this year. The solid retention rate demonstrates the continued value CJ delivers in the recruitment of cleared professionals. Dice revenue was $15.7 million, which was down 17% year-over-year and down 10% sequentially. Dice bookings were $20.2 million, down 20% year-over-year. We ended the quarter with 3,832 Dice recruitment package customers, which is down 7% from the last quarter and down 15% year-over-year. Dice revenue renewal rate was 71% for the quarter and its retention rate was 100%. The reduction in customer count and Dice's renewal rate from the prior year quarter continues to be attributable to churn with smaller customers spending less than $15,000 per year, representing 80% of the total churn on count and who are more likely to be impacted by the difficult macro environment and uncertainty. We believe the introduction of our new Dice platform, which offers customers the flexibility of monthly subscriptions will offset the churn among smaller accounts by lowering upfront commitment and improving affordability. Our average annual revenue per Dice recruitment package customer was $15,466, down 6% year-over-year and down 1% sequentially. As with CJ, approximately 90% of Dice revenue is recurring and comes from annual or multiyear contracts. Deferred revenue at the end of the quarter was $44.5 million, down 12% from the first quarter of last year. Our total committed contract backlog at the end of the quarter was $99.0 million, which was down 8% from the end of the first quarter last year. Short-term backlog was $77.2 million at the end of the quarter and long-term backlog, that is revenue to be recognized in 13 or more months, was $21.8 million. Both brands onboarded notable clients in the first quarter. For CJ, this includes Akamai Intelligence, SynthBee and Michigan Technological University, while Dice landed Avera Health, Fourth Yuga Tech and Parkland Center for Clinical Innovation as customers in Q1. Now let's move to operating expenses. For the quarter, our operating expenses decreased $15.0 million or 36% to $26.6 million when compared to $41.6 million in the year ago quarter. Improvements to our operating efficiency, including the Dice Employer Experience platform, along with adjusting the business for the difficult market environment over the past few years has significantly reduced our annual operating expenses and capitalized development costs. For the quarter, we had income tax expense of $1.0 million on income before taxes of $2.5 million. Our tax rate for the quarter differed from our approximate statutory rate of 25% due to the tax impacts of stock-based compensation. Although our income subject to tax has grown, the tax law change in 2025, which allows for the immediate deduction of R&D costs will partially offset our 2026 cash outlay for income taxes. Moving on to the bottom line. We reported net income of $1.5 million or $0.04 per diluted share in the quarter. For the prior year quarter, we reported a net loss of $9.8 million or $0.21 per diluted share, which included a $7.8 million Dice goodwill impairment charge and a $2.3 million restructuring charge. Non-GAAP earnings per share for the quarter was $0.08 per share compared to $0.04 per share for the prior year quarter. Diluted shares outstanding for the quarter were 42.4 million shares, down 3.1 million shares or 7% from the prior year quarter as we continue to return cash to shareholders through our share repurchase program. Adjusted EBITDA for the quarter was $8.1 million, a margin of 27% compared to $7.0 million or a margin of 22% a year ago. On a segmented basis, CJ adjusted EBITDA remained strong at $5.7 million in the first quarter, representing a 40% adjusted EBITDA margin as compared to adjusted EBITDA of $5.7 million or a margin of 43% in the prior year period. Dice's adjusted EBITDA increased to $4.3 million, representing a 28% adjusted EBITDA margin compared to $3.4 million and an 18% margin last year. Operating cash flow for the first quarter was $8.4 million compared to $2.2 million in the prior year period. Free cash flow, which is operating cash flows less capital expenditures, was $6.8 million for the first quarter compared to $88,000 in the first quarter of last year. Our capital expenditures, which consist primarily of capitalized development costs were $1.6 million in the first quarter compared to $2.2 million in the first quarter last year, an improvement of 24%. Capitalized development costs in the first quarter for CJ were $577,000 compared to $362,000 a year ago, while capitalized development costs for Dice were $1 million this quarter as compared to $1.7 million a year ago. We are targeting total capital expenditures in 2026 to range between $7 million and $8 million as compared to $7.3 million last year. From a liquidity perspective, at the end of the quarter, we had $3.0 million in cash, and our total debt was $33 million, an increase of $3 million from the last quarter despite cash outlays in the quarter of $5 million for the purchase of PSG and $4.7 million for the purchase of 2 million shares under our stock repurchase programs. Leverage at the end of the quarter was 0.91x our adjusted EBITDA and we continue to target 1x leverage for the business. At the end of the quarter, we had $6.4 million remaining on our $10 million share repurchase program. Moving on to guidance. We continue to expect ClearanceJobs bookings to grow in 2026. However, we do not anticipate Dice bookings growth resuming until tech hiring improves. As a result, we expect DHI revenue of $124 million to $128 million for the full year. And for the second quarter, we expect revenue of $30 million to $32 million. For CJ, with the addition of PSG, we expect revenue of $62 million to $64 million for the full year. And for the second quarter, we expect revenue of $15 million to $16 million. At Dice, we expect revenue of $62 million to $64 million for the full year. And for the second quarter, we expect revenue of $15 million to $16 million. From a profitability standpoint, we continue to target full year adjusted EBITDA margin for DHI of 25% and margins of 40% for CJ and 22% for Dice. Our focus remains on delivering long-term sustainable and profitable revenue growth, along with strong free cash flow generation, averaging at or above 10% of revenues. To wrap up, although the hiring environment over the past few years has impacted our revenue growth, we remain optimistic about the road ahead. We anticipate the record-breaking defense budget will be a growth driver for CJ and that companies across all industries will steadily increase their investments in technology initiatives, creating a strong growth opportunity for both ClearanceJobs and Dice. We remain focused on strengthening our industry-leading solutions, optimizing our go-to-market strategy and executing with efficiency, ensuring we are well positioned to capitalize on the opportunities that lie ahead. And with that, let me turn the call back to Art. Art Zeile: I want to thank all of our team members once again for their outstanding work this quarter. It is a pleasure to be part of such a great team. That said, we are happy to answer your questions. Operator: We'll now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Gary Prestopino with Barrington Research. Gary Prestopino: Greg, what was the -- I'm sorry, I didn't get a chance to write down the capitalized development costs. What were they in the quarter? Greg Schippers: So in the quarter, the capitalized development costs were $1.6 million, Gary. Gary Prestopino: Okay. $1.6 million. And then with the acquisition of PSG, is that really entirely the reason for the revenue -- the increase in the revenue range at CJ? Or are you performing better than you expected from the start of the year? Greg Schippers: Yes. Good question, Gary. And that is purely related to the revenue from PSG at this stage. And we anticipated some improvement within CJ in the budget, but more in the bookings area as opposed to in revenue, which, as you may recall, had some revenue -- or had some bookings challenges in the mid- to latter part of 2025 for CJ. And so that -- as that converts to revenue, that is going to challenge revenue in 2026 minus PSG. Gary Prestopino: And then lastly, and I'll jump off and let somebody else go. Dice retention increased to 100% from 92%, which basically means you're getting good renewals and you're not losing that base business, I suppose, as I'm reading that right. Is that kind of a good leading -- somewhat of a leading indicator for Dice? Or am I just reading that wrong? Art Zeile: So Gary, you're reading that absolutely correctly. I think that we're seeing a stabilization in demand in the environment. And it's consistent with the fact that staffing industry analysts as well as a number of different resources have indicated that we've kind of crossed the line for tech staffing and it's going to be a growth area for 2026. And we're seeing that sentiment improve across our staffing firms. Operator: And our next question today comes from Max Michaelis with Lake Street. Maxwell Michaelis: First one for me. When we look at the CompTIA and the job postings, I think you said 537,000 jobs this month or month of March and then 254,000 new jobs. I know a lot of it's related to AI, but you said you haven't really seen an uptick in bookings from that. I figured you would have. Is there a reason why? Has there always been kind of a laggard effect with CompTIA and the impact on bookings? And then I guess with that, what are some of the things you're hearing from your customers? Is it going to be more of a late 2026 where they see more of their -- or more business coming on to your platform, I guess, lack of a better word? Art Zeile: Yes, that's a great question, Max. And I have to say that the number of new tech job postings is definitely a leading indicator. But you have to understand that the historical pattern of our customers have been to essentially have their contracts start in every month in the year, right? There is kind of a crescendo that takes place in December and January. So they're thinking about how they're going to renew in forward months based on what they're seeing as a leading indicator today in terms of new tech job postings. But it's pretty significant. Like I said, 19% growth of March 2026 over March 2025 is a pretty big signal. As an aside, staffing industry analysts just posted an article yesterday that's entitled IT staffing turning the corner. And Bloomberg, the same day yesterday, posted an article that's entitled companies increasingly favor temps over permanent hires and kind of they're both coupled. We believe that in this kind of environment, it's a less risky move to essentially go to a staffing agency for your tech hiring needs rather than going to permanent hire. So it's all kind of coming together right now. Maxwell Michaelis: So really, the impact of this, you really wouldn't see that towards the end -- until the end of 2026, correct? Art Zeile: I think it's -- that's correct. It's going to be playing out over the course of the year. And again, those folks that are intended to renew in third quarter and fourth quarter are probably now starting to factor this in, seeing that the demand is increasing. And like I said, 254,000 jobs is a significant increase over the roughly 200,000 jobs that we saw most of last year. So it's a pretty good signal. Maxwell Michaelis: Okay. That makes sense. And if we look at some of the acquisitions you've made, the Point Solutions, ATS, you said they were performing better than what you guys had originally expected. I mean is that with just a revenue standpoint? Or can you help me out or is there anything else you can offer that can kind of give me a better understanding of how these are actually outperforming better than what you originally expected? Art Zeile: So that comment in the earnings call was really intended to focus on AgileATS. And I would say that the bookings and revenue figure are performing better than expected, although it was a pretty small base when we bought the company back in July of last year. For PSG, Point Solutions Group, it's a little bit too early to tell. We closed that transaction right at the end of February. And so we're kind of moving into the integration phase. But the good news is we actually have now established 2 new relationships, 2 new subcontracts to primes even within that short period of time. So it feels like we're on our way. Maxwell Michaelis: All right. Last one for me, and then I'll hang up the mic. It seems to be a common thing you guys are acquiring companies kind of in the defense space. I mean is there an active pipeline right now where you guys could see yourself acquiring another one of these companies kind of in that defense adjacent landscape? Art Zeile: Yes. I would say that true to what we described, we view CJ as a platform and that we have these trusted relationships with 1,800 very important military contractors. We want to sell them more and especially sell them more in that talent acquisition and management space. So there is a view to additional tuck-in acquisitions over the course of time. Operator: [Operator Instructions] Our next question comes from Kevin Liu at K. Liu & Company LLC. Kevin Liu: I know on CJ, a lot of the traction there and momentum is going to be tied to kind of this defense funding. But I was curious if you guys had any exposure to DHS and whether you think kind of the recent funding approval there, if that kind of resuscitates any deals you had in the pipeline? Art Zeile: That's actually very insightful. I would have to say that one of our larger customers was the Cybersecurity Infrastructure Services Administration, CISA, which is a division of DHS. And they did not renew last year. I think that's based on 2 different factors. It was based on the fact that their funding was uncertain at the time, but also the fact that there is a hiring freeze across most government institutions. We believe, based on the fact that there was a leak that took place that indicated that they are down in terms of their staffing by 40%, that they will be allowed to kind of hire again and they're going to need a platform to do so. So there are elements of the government that I think that will be kind of freed by this funding of DHS and then the need to essentially plug holes in really critical areas in the government. Kevin Liu: Got it. And just related to that, you guys did reference kind of a large contract that hadn't renewed early in the year, but should come back later in the year. Was that related to this at all? Or is that just kind of a separate deal? Art Zeile: It was unrelated. In this particular case, the customer in a cost-saving move believed that they could move to a competitor of ours called ClearedJobs.Net. This is a platform that is roughly about 120th our size, and they've already admitted that this was probably not in their best interest. So we're still in discussions with them and we hope that they will essentially renew a subscription at their next budget cycle, which is in third quarter. Kevin Liu: All right. Sounds good. And then I was hoping you could put a finer point just on the contribution from Point Solutions Group. What's kind of the expected contribution to the revenue line, both in Q2 and the full year? Greg Schippers: Yes, this is Greg. Kevin, so we -- and you can really kind of see this in the guidance. We uplifted our guidance by approximately $6 million for the full year. And so that's roughly where we're anticipating for this 10-month period to land with PSG. Kevin Liu: All right. That's helpful. And then just lastly for me, as it seems like the environment starts to turn here, just wondering how you're thinking about kind of the timing of maybe investing a bit more on either the sales or marketing side. Art Zeile: That's a great question. I can tell you that we've always been pretty conservative, especially over the last 3 years as we're kind of waiting for this tech hiring recession to resolve itself. I would say that for ClearanceJobs because we see a clear signal associated with the defense budget being put into law this past January and kind of a robust amount of interest, that's where we would essentially hire more people into sales and have more marketing spend at this point in time. But it's early days. I would say that we want to see that play out, and we want to see the firming up and stabilization and increasing of demand before we do. So I would not assume that we're going to change our sales and marketing pattern for either brands for now, but we're assessing it real time for the remainder of the year. Greg Schippers: The one other thing I might just add to that is we do have some additional investment in marketing for Dice, specifically related to the self-service platform, the digital experience platform in the remainder of the year to drive some revenue from that platform. Kevin Liu: Congrats on a [ full expected year ]. Operator: And that does conclude our question-and-answer session. I'd like to turn the conference back over to Art Zeile for any closing remarks. Art Zeile: Well, thank you, Rocco, and thank you all for joining us today. As always, if you have any questions about our company or would like to speak with management, please reach out to Todd Kehrli, and he will assist you in arranging a meeting. Thank you, everyone, for your interest in DHI Group, and have a great Cinco de Mayo. Operator: Thank you, sir. And everyone, that does conclude our conference for today. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful evening.
Operator: Good afternoon, and welcome to loanDepot's First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to hand the call over to Gerhard Erdelji, Senior Vice President, Investor Relations. Please go ahead. Gerhard Erdelji: Good afternoon, everyone, and thank you for joining our First Quarter 2026 Earnings Call. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements regarding the company's operating and financial performance in future periods. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued earlier today, which is available on our website at investors.loandepot.com. Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into analyzing and benchmarking the performance and value of our business and facilitating company-to-company operating performance comparisons. For more details on these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP measures, please refer to today's earnings release. A webcast and transcript of this call will be posted on our website after the conclusion of this call. On today's call, we have loanDepot's Founder and Chief Executive Officer, Anthony Hsieh; and Chief Financial Officer, David Hayes. They will provide an overview of our quarter, a review of our operating results and our outlook. We're also joined by Chief Investment Officer, Jeff DerGurahian; and Chief Digital Officer, Dominick Marchetti, to help answer your questions after our prepared remarks. And with that, I'll turn things over to Anthony to get us started. Anthony? Anthony Hsieh: Thank you, Gerhard. I appreciate everyone joining us on the call today. We are now 3 quarters into the rebuild of our company. And I believe that all of our hard work will soon be reflected in our financial performance. We spent the most recent quarter focused on a series of long-term growth initiatives that we expect will accelerate our momentum in coming months, including the addition of over 100 new loan officers, the reimagining and relaunch of our wholesale business and the completion of our game-changing partnership agreement with Figure. I'll talk about each of these initiatives in more detail in a moment, but I'm pleased to share they are delivering promising early results. Since my return as CEO, I have been laser-focused on our digital transformation as a key enabler of our return to a market-leading position. We have focused on fully leveraging our unique assets and strategy, including one of the most differentiated customer acquisition and retention business models in the marketplace today. This included rebuilding our management team with members that have deep mortgage technology and marketing IQ. With this team now largely in place, we have spent the past several quarters hiring and training more loan officers with the goal of growing market share and positioning ourselves for accelerated growth when demand increases. This growth is broad-based and consists of newly trained loan officers graduating from our proprietary ACES program in our direct channel and experienced loan officers with established businesses in our retail channel. We also recently reopened our wholesale channel as part of our strategy to offer more products to our customers and leverage our existing infrastructure while limiting incremental expenses. Response from the broker community has been very positive, with many directly reaching out seeking to partner with loanDepot. Despite a volatile market environment, these initiatives helped us increase market share during the quarter, which I consider vital to our goal of achieving consistent profitability in the current market. Behind the scenes, we remain focused on reducing unit costs through operating leverage and automation. As demonstrated this quarter, we sharpened our marketing strategies to drive more lot volume to the top of the funnel while reducing marketing costs, increasing our return on marketing. Looking forward, I believe the digital migration of the customer will continue to accelerate, and we plan to be there to meet the customer. Led by our digital team, we are hard at work introducing cutting-edge technology and AI capabilities to our repeatable and scalable functions across each aspect of the origination and servicing life cycle, including lead acquisition and conversion, loan officer and servicing CRM management and underwriting process. Our recently announced partnership with Figure Technology Solutions is expected to meaningfully accelerate our work and is delivering promising early results. As part of this partnership, we integrated Figure's proprietary credit and loan underwriting engine into our own proprietary mello technology platform. enabling us to seamlessly offer a variety of innovative home loan products to our customers. Importantly, our partnership also positions us to introduce new and innovative products that expand the way we serve borrowers in the future and capitalize on market improvements. The 5x5 HomeLoan, which delivers approval in as little as 5 minutes and funding in as few as 5 days brings real value to those seeking speed and convenience in their financial transaction. As we integrate this platform across our channels, we expect to lower our cost of production, improve the customer experience, close more loans quickly and advance our long-term objective of profitable market share growth. We also believe that this product will be a consistent contributor to the earnings power of the company as customers with record levels of home equity and historically low interest rates on their First Trustees should remain a reliable source of demand even as interest rates fall. As we look ahead with expectations of a larger market, our top of the funnel customer acquisition advantage uniquely positions us to outperform our competition in a rapidly evolving and consolidating marketplace. I'm proud of the work that has been accomplished since my return to a full-time operating role. We plan to continue investing in growing our top of the funnel customer acquisition and origination capabilities, leveraging our brand and marketing muscle, along with introducing contemporary technology, including AI, which should lower our costs and increase our operating efficiency. Ultimately, our goal are to deliver profitable market share growth, improve the borrower experience, drive customer retention and deliver long-term shareholder value. This is our mission and what we are working towards every day. Regardless of interest rate movements, we are focused on delivering consistent profitability. We believe we are well on our way towards that goal. And as rates fall, that time line will be shortened. With that, I will now turn the call over to Dave, who will take us through our financial results in more detail. Dave? David Hayes: Thanks, Anthony, and good afternoon, everyone. The quarter reflected continued progress towards sustainable profitability, offset by geopolitically driven market volatility. We reported an adjusted net loss of $34 million in the first quarter compared to an adjusted net loss of $21 million in the fourth quarter of 2025 due primarily to lower pull-through weighted gain on sale margin, offset somewhat by lower expenses. During the first quarter, pull-through weighted rate lock volume was $8.3 billion, which represented a 14% increase from the prior quarter volume of $7.3 billion. Pull-through weighted rate lock volume came in within the guidance we issued last quarter of $7.75 billion to $8.75 billion and contributed to adjusted total revenue of $299 million, which compared to $316 million in the fourth quarter of 2025. As Anthony mentioned, the growth in rate lock volume was achieved while reducing marketing expenses by 12% during the quarter. This positive operating leverage reflected improved strategies for mid-funnel lead conversion and our sharpened marketing strategies. Our pull-through weighted gain on sale margin for the fourth quarter came in at 271 basis points at the low end of our guidance range of 270 basis points to 300 basis points and down compared to 324 basis points to the prior quarter. Our lower gain on sale margin primarily reflected interest rate volatility and product mix shift. The geopolitical environment created a sharp increase in interest rates during the first quarter, and we originated fewer higher-margin FHA, VA and HELOC loans and originated more conventional loans, both effects compressing our margin. Higher interest rates during the quarter also generated wider negative fair value marks on our mortgage servicing and trading securities, contributing to lower revenue. Our loan origination volume was $7.7 billion for the quarter, a decrease of 5% from the prior quarter's volume of $8 billion. This was at the high end of our guidance we issued last quarter of between $6.75 billion and $7.75 billion. Closed loan volume also represented a market share increase, demonstrating the success in investing in increasing our loan officers. Servicing fee income decreased from $113 million in the fourth quarter of 2025 to $109 million in the first quarter and primarily due to lower interest earnings from lower custodial balances, along with fewer days in the quarter. Despite the lower servicing revenue, we're able to increase our market-leading recapture rate to 73% from the prior quarter's 71%. We hedge our servicing portfolio, so we do not record the full impact of the changes in fair value and the results of our operations. We believe this strategy helps protect against volatility in our earnings and liquidity. Our strategy for hedging the servicing portfolio is dynamic, and we adjust our hedge positions in reaction to the changing interest rate environment. Our total expenses for the first quarter decreased by $565,000 from the prior quarter. We guided to higher expenses during the quarter, but ended up delivering a decrease. The primary drivers of the decrease were lower commissions due to the impact of implementing a more efficient commission strategies and lower marketing expenses, as I previously discussed. Salary-related expenses increased due to higher headcount as we build capacity and the impact from seasonal employment tax resets. We also experienced higher direct origination expenses as vendors increased the cost of credit reporting services. We believe that process and workflow improvements underway should mitigate some of the increased credit reporting costs going forward. Looking ahead to the second quarter. We expect pull-through weighted lock volume of between $5.75 billion and $7.75 billion, and origination volume of between $7.25 billion and $9.25 billion. These ranges reflect a shift in mix as our 5x5 HomeLoan product ramps up, which has a very fast funding profile and which volume is not reflected in the lock volume, but is reflected in the closed loan volume. We expect our second quarter pull-through weighted gain on sale margin to be between 330 basis points and 360 basis points. When evaluating our margin guidance, keep in mind that HELOC products are originated without an interest rate lock. Therefore, our guidance reflects the expected revenue contribution of those products in the numerator, but expected volume is not included in the denominator. They also generally carry a higher gain on sale margin, but lower average loan balances and combined with leveraging the Figure underwriting platform, have a lower cost structure. Taken together, we believe the partnership will have a positive impact on our bottom line and a meaningful contributor to growth going forward. Our total expenses are expected to increase in the second quarter, primarily driven by higher volume-related costs, reflecting higher expected originations quarter-over-quarter. We ended the quarter with $277 million in cash, decreasing by $60 million from the fourth quarter, reflecting our net loss, the investment in servicing rights and timing differences related to our MSR secured borrowings. Anthony stated this earlier, but it bears repeating. Our goals are to continue investing in driving top line and market share growth, reducing our costs and increasing operating leverage and applying automation and technology across the origination and servicing business to achieve consistent profitability in any environment. With that, we're ready to turn it back over to the operator for Q&A. Operator? Operator: [Operator Instructions] Your first question comes from the line of Mihir Bhatia with Bank of America. Mihir Bhatia: I wanted to start maybe with just the gain on sale margin guide. You have a reasonable step-up in the guide between -- from the first quarter's 271 bps level. Can you just talk about some of the factors that are driving that? David Hayes: Yes. Sure. It's David Hayes. It's really reflective of a couple of things. But first and foremost, it's the introduction of our 5x5 loan product, which is a HELOC product. That carries a much stronger gain on sale margin with it. And with the recent partnership with Figure, we've really started to ramp that production. So, we're seeing a higher percentage mix of volume coming from that product, which is averaging up our gain on sale margin. Additionally, on the First Trustee side of the house, we saw a product mix shift that diluted our margin in the first quarter, and we're starting to see that shift back towards FHA, VA and overall higher home equity volumes, which is also contributing to a higher gain on sale margin. Mihir Bhatia: Okay. Got it. And then just on the volume and pull-through dynamics. I think there's weighted locks, I think, in 1Q were $8 billion. You're obviously guiding to some funded originations here in 2Q, but the locks for 1Q is like $5.75 billion to $7.7 billion, like a little bit smaller than first quarter. Are you making changes in your pull-through fallout or assumptions, or something else happening there? Or is this just every year seasonality from 1Q to 2Q? David Hayes: No. This is kind of a pretty significant shift I commented in the prepared remarks, where with the ramping of this new 5x5 product, it's a HELOC and there's no lock associated with it. So instead, when you look at our lock guidance, that volume is not represented there. It is represented in our funded volume. And so you'll see where our lock volume came down is because all that volume is showing up in funded volume. It's a very quick turn time on that. So the time from app to fund is very quick. But there is no lock associated with it. Mihir Bhatia: So, there's no major change quarter-over-quarter in the base mortgage business. The changes are happening in the home equity business. Is that the right understanding? David Hayes: Correct. We view... Mihir Bhatia: The changes are happening... David Hayes: To be clear, it's the product mix shift between a higher percentage of -- an expectation of higher percentage of HELOCs versus First Trustees. Anthony Hsieh: Yes. And this is Anthony Hsieh. I just want to chime in and add my two cents to what David described. It's not only a difference in how we measure revenue because the HELOC loan is not locked. However, the bigger difference is that a locked loan, the normal cycle is around 25 days to 33 days until you recognize the funding of that loan. Our 5x5 product is funding in 5 to 7 calendar days. So, it's a very fast process because it utilizes technology to fund loans and process loans. So ultimately, it's going to drive down our cost to produce, but it does change the pull-through as you look at it from the traditional way because we're not publishing the origination on these HELOC 5x5 loans. Mihir Bhatia: Got it. Sorry, can I squeeze one more in just on the recapture rate and refinance volume? Obviously, a pretty volatile quarter from interest rates. Wondering what you saw happen, -- was there differences between what recapture rate and competitive intensity look like in Jan, February versus maybe March, April? Any comments just quarter-to-date also on that? Anthony Hsieh: I didn't understand that question. I'm sorry. Mihir Bhatia: Sorry. I was just wondering if there was any differences? Yes, just intra-quarter dynamics between both recapture rate -- between competitive intensity and recaptures just given the movement in interest rates. David Hayes: No, we didn't see anything really different in recapture behavior and performance. Operator: Our next question comes from Mikhail Goberman with Citizens JMP. Mikhail Goberman: If I could get some color on how you guys see the mix between origination income and servicing fee income going forward? And also separately, to what extent do you guys think or not that a substantial decline in mortgage interest rates is needed to get a sort of a run rate of earnings that starts to trend in the right direction? Anthony Hsieh: So, I'll take the second question and perhaps, David, you can take the first question, the blend between servicing income and origination income. So it's been a solid 3 quarters since we have redirected and started to rebuild the organization. And of course, if yield was at 4.0% today on the 10-year, the environment here would be substantially different. However, understanding that we're at 4.4% to 4.5%, we are still quite bullish based on all of the hard work that we have done. We have shown tremendous progress in market share, top line revenue growth and more meaningfully is our efficiency and marketing. As we drive top of the funnel leads, our ability to convert mid-funnel and conversion to originations, that has changed in a meaningful way over the last 3 quarters. So as long as we continue and we have every reason to believe that we will continue to drive that positive momentum, and that really is the roots of this organization. And that is producing lead flow at the top of the funnel and converting it in a best-in-class within the industry for us to scale and have profitable market share growth. That's exactly what we did from 2010 to 2022. So, we are resuming a playbook that has worked for decades. It just is going to take some time in order for us to build all the mechanics, the tools, the measuring, monitoring as well as personnel management, and we're well on our way in doing that. David Hayes: Yes. And I'll just add from sort of the mix question around servicing revenue relative to mortgage revenue. I would say, obviously, the servicing revenue will be a function of rates and run-off. But generally speaking, I would expect that to grow quarter-over-quarter by a couple of percentage points. We really think that the opportunity lies on the mortgage revenue side. We're heavily investing in loan officer additions across both the direct and retail side of the house. And by virtue of that, we think that we should be able to grow mortgage revenue quarter-to-quarter from where we sit today, coupled with sort of the seasonality of the business for second and third quarters. Mikhail Goberman: Great. Fantastic color. If I could just squeeze in one more as well. Just curious about the liability side of your balance sheet, your thoughts on addressing upcoming debt maturities. David Hayes: Sure. Yes, popular question. That is something that the management team and the Board is very actively engaged in and with the discussions with bankers. So, we are looking at strategies to address that in a pretty comprehensive way. The markets are quite turbulent as you well know, right now. And so we are trying to be very thoughtful about how we approach that, but we were hoping to have a resolution on that in the coming months. Operator: There are no further questions at this time. Anthony Hsieh, I turn the call back over to you. Anthony Hsieh: Thank you. On behalf of Dave, Jeff, Dom and the rest of our team, I want to thank you for joining us today. The pieces are in place. We are executing on our strategy to compete at the highest levels by returning to our core strength. Our strategy rests on 4 objectives: one, investing in the business through growth, operational efficiency and infrastructure; two, becoming a best-in-class mortgage banker or in other words, find another loan, close it faster, produce it cheaper and maintain superior loan quality. Three, growing profitable market share by hiring and training sales professionals in each of our channels and by increasing our channel and distribution capabilities. We plan to grow our origination capacity to capture profitable market share growth across refinance, resale and new home loans. And finally, four, returning to profitability by investing in our origination and new customer acquisition capabilities, growing our servicing portfolio, improving our recapture rates, growing our brand and marketing and increasing our operating leverage. We believe we can return to consistent profitability. This is how we win. Executing these objectives positions us to create sustainable value for our shareholders while accelerating growth in a competitive landscape. So thanks again, everybody, and I appreciate your support. Operator? Operator: This concludes today's conference call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to Compass, Inc. 2026 Q1 Earnings Call. [Operator Instructions] I would now like to turn the call over to Soham Bhonsle, Head of Investor Relations. Please go ahead. Soham Bhonsle: Thank you very much, operator, and good afternoon, everybody, and thank you for joining the Compass First Quarter 2026 Earnings Call. Joining us today will be Robert Reffkin, our Founder and CEO; and Scott Wahlers, our Chief Financial Officer. In discussing our company's performance, we will refer to some non-GAAP measures. You can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our first quarter 2026 earnings release posted on our Investor Relations website. Additionally, note that since the financial results from the Anywhere transaction are not included in the prior year period or the first 8 days of Q1 2026, the current year and prior year results are not comparable. We have provided supplemental information included in the Form 8-K filed today that presents our revenue and commissions expenses and key business metrics on a pro forma basis as though the businesses were combined from the beginning of 2025. We believe this additional information will be useful to investors to assist in comparing the periods prior and subsequent to the closing of the Anywhere transaction. We will also be making forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the second quarter of 2026 and full year 2026 and comments related to our expectations for realizing cost synergies and operational achievements. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K filed with the SEC and available on our Investor Relations website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, May 5. We expressly disclaim any obligation to update this information. I will now turn the call over to Robert Reffkin. Robert? Robert Reffkin: Good afternoon, and thank you for joining us for our First Quarter Conference Call. Before I go over our strong Q1 results, I would like to provide an update on our cost synergy targets and highlight a few early wins since we closed the Anywhere transaction. First, on our cost synergies. On our Q4 earnings call in February, we shared our target of $250 million in cost synergies to be actioned by the end of year 1 and $400 million in net cost synergies over 3 years. I am very pleased to share that we are increasing our target to $300 million in cost synergies to be actioned by the end of year 1. And $500 million in net cost synergies over 3 years, of which $420 million is expected to be realized through the P&L and $80 million is expected to be realized as a CapEx synergy. Moreover, we have now actioned over $250 million in cost synergies as of April 1, which is only 82 days since we closed the Anywhere transaction. The acceleration results in an increase in our 2026 in-year realized cost synergies from approximately $100 million to $200 million. We previously expected $40 million of the $100 million of our cost synergies to be realized through the P&L as an OpEx synergy with the remainder being realized as a CapEx synergy. Based on the increased realization of the target, we now expect about $130 million to be realized through the P&L and $70 million expected to be realized as a CapEx synergy. This reflects a roughly $90 million increase in our in-year realized OpEx synergy expectations and a $10 million increase in our in-year CapEx synergy expectations compared to our prior expectations due to the larger in-year realized target of $200 million. Shifting now to our early Q1 wins that represent the growth and success in our brokerage brands. Sotheby's International Realty sold the most expensive home in the history of the world at $350 million. While Coldwell Banker sold the most expensive home in the history of Miami-Dade County at $170 million. Both sales reinforce the combined company's authority in the luxury segment. Corcoran Sunshine, which is Corcoran's new development business, posted its strongest contract volume quarter in over 10 years with $1.5 billion in contracts signed in Q1. ERA executed its largest franchise sale transaction in 15 years. Better Homes and Gardens executed its largest franchise M&A transaction in the entire history of the brand. Christie's International Real Estate signed on 8 new franchise agreements in the quarter, all for new markets, which reflects the largest quarterly expansion in the history of the brand. CENTURY 21 recently executed its largest franchise sale transaction in 10 years with our stance on home seller choice being a key reason for the broker owner, Greg Hague, choosing to join. In fact, Greg will be coaching our real estate professionals across our brands on home sales strategy given his impressive track record, which includes building a home sale strategy consulting and training company that Inc. 5000 ranked among the top 250 fastest-growing privately held firms in America. Compass recruited more principal agents in Q1 than any prior Q1 in our history. We are now also scaling Compass' most effective recruiting strategies across all brands, starting with demand generation and brand-specific recruiting websites that outline how our technology platform helps agents grow their business. And finally, Coldwell Banker GCI retention rate in its top 2 quartile of agents, representing 82% of its total GCI over the trailing 12-month period, hit a 10-year high at 94.6% retention rate in Q1. In our title and escrow business, we are consolidating our operations onto a single technology platform, which we expect will unlock sizable long-term savings through centralization once completed. In our mortgage business, GRA, which was Anywhere's JV with Guaranteed Rate, achieved its highest attach quarter in 2.5 years, while OriginPoint, which is Compass' JV, achieved its highest attach rate ever in Q1 and delivered its best quarter of profitability. Going forward, we see a significant opportunity to continue to improve both our attach rate and profitability in our mortgage JVs. Lastly, we are moving forward with our digital mortgage partnership with Rocket Mortgage, with Rocket's prequalification experience now embedded across all listings on compass.com. Our data and analytics team, led by Dave Crosby and supported by our Chief Economist, Mike Simonsen is executing a radical simplification of our significantly expanded data state. Since closing the Anywhere transaction, we've identified over 6,000 legacy reports and have already deprecated over half of them and are on a disciplined path to standardization across the entire company to get to approximately 100 high-fidelity reports. By minimizing the number of reports, it will allow our data team to focus on critical integration tasks and the development of proprietary insights by Q4 of this year, which we believe will provide our real estate professionals, title agents and mortgage officers the ability to win more business in the marketplace. Now turning to our Q1 2026 pro forma results. [Technical Difficulty] Operator: Ladies and gentlemen, thank you for your patience and standing by while we experience technical difficulties. I will now turn the call over to the management team to continue their prepared remarks. Robert Reffkin: Thank you. And again, sorry for the technical difficulties. Let me continue. In Q1, Compass, we delivered pro forma revenue of $2.76 billion, up 7% year-over-year compared to pro forma revenue of $2.58 billion a year ago. We reported adjusted EBITDA of $61 million. Our Q1 revenue came in above the midpoint of our guide and our adjusted EBITDA came in above the high end of our guide. In our brokerage business, which includes the Coldwell Banker, Compass, Corcoran and Sotheby's International Realty brands, pro forma transactions were up 2.6% year-over-year compared to the market, which was flat year-over-year. This means that for 20 consecutive quarters, our brokerage business has outperformed the market on an organic basis. Pro forma brokerage GTV was up 7.3% year-over-year compared to the market that was up 1.5%. Pro forma total agent adds on a gross basis were 3,503, which was higher than Q4 2025 levels. Pro forma total agent retention in our brokerage business was 94%, flat compared to Q4 2025. Excluding agents with 0 GCI in the last 12 months, pro forma agent retention would have been 97% in Q1 and excluding agents with $20,000 or less in GCI in the last 12 months, which on average equates to less than 2 transactions at our price points, pro forma agent retention would have been over 98% in Q1. Pro forma productivity per agent, which we measure as GTV per agent was up nicely year-over-year. Going forward, our brokerage recruiting and retention strategy as a combined company will be focused on productive agents as well as up and coming agents. We expect this to lead to a healthy level of agent adds, combined with improving agent retention and agent productivity growth. In franchise, pro forma GTV was up 4.6% year-over-year compared to housing market volumes that were up 1.5%, reflecting 310 basis points of outperformance. Our Sotheby's International Realty and Corcoran brands continue to outperform the company average, while total franchise sales experienced a meaningful increase year-over-year. Pro forma integrated services revenue grew 11% year-over-year with title -- T&E revenue being the primary driver. The quarter benefited from strong refinance activity with pro forma refi transactions up 100% year-over-year, while pro forma purchase transactions grew 4% year-over-year. Purchase transaction growth outperformed overall housing market growth at 0.2% year-over-year. These strong results would not have been possible without each and every member of our team. I want to thank the entire team for their focus and hard work in a quarter of significant change for our company. Now let me provide a few thoughts on our partnership with Rocket, Redfin and the industry's shifting stance on phased marketing. First, we are pleased to see several other portals and brokerages following our lead on home seller choice and phased marketing. Sellers want more choices, not less choices. And as coming soon are provided as an option to more sellers, they will realize they have more options and more choices on how to market a home than any -- and we, as a company, have consistently provided sellers with more options than our other competing brokerage firms. We believe that will help our real estate professionals continue to outperform the market and win listings with their sellers. Second, while we see others in the marketplace attempting to recreate an offering similar to ours, for several reasons, we are confident that the Compass 3-Phased Marketing option with the coming soon phase also being on Redfin is the best option for phased marketing in real estate. Here are a few reasons why. First, unlike the other option in the marketplace, all of our coming soon buyer inquiries are always sent directly to the listing agent. The person that knows the property the best as opposed to when you click the contact tour or schedule appointment contact agent button it being rediverted to a third-party agent who doesn't know the listing the best. Second, unlike the other major portals coming soon option, in our case, we always allow the listing agent to do showings and we always allow open houses. That is not the case for the alternative options. Third, real estate is a local business. And with our depth of inventory in major markets, we believe we'll be able to send a strong signal to consumers to search compass.com and our other brokerage websites. Of note, compass.com was the fastest-growing real estate website in Q1 with 38% year-over-year growth in monthly average users and is now the sixth largest audience in real estate for a Similarweb. Fourth, our agents can offer their buyers 1% off the mortgage rate through Rocket, a significant advantage, particularly in the current environment. And our advantage is being borne out in the numbers. In the Chicago metro area, which is the third largest housing market in the country by unit count, we have launched roughly 1,000 coming soon since we announced the partnership. This compares to virtually no unique coming soon inventory in the Chicago metro area that we can observe on the other portals as of last week. To date, we sent approximately 3,000 buyer inquiries back to listing agents from Compass coming soon on Redfin. These inquiries charge no referral fee from Redfin to the listing agent. And all of these buyer inquiries are incremental to what our listings -- real estate professionals would have received without the Redfin partnership. In addition to free buyer inquiries, our real estate professionals are also receiving a minimum of 1.2 million leads from Rocket and Redfin over the next 3 years with over 24,000 leads already having been given to our real estate professionals since the partnership was announced. Furthermore, we have also seen recruiting momentum pick up in the Compass brand since our announcement and principal agent recruiting is off to a faster start in Q2 than expected. One of the reasons for this is their interest in the Redfin and Rocket partnership as they want to benefit from these leads as well. Shifting to the earnings potential of our combined business. A common question we received from the investment community is what the earnings profile of the combined business could be in various housing market scenarios. In our investor deck this quarter, we have provided a scenario analysis to demonstrate how we are positioned to generate resilient financial performance even in a flat housing market and capture significant upside as the market improves and once we realize our cost synergies. Importantly, these scenarios assume no agent adds, no organic share take, no margin improvement, no improvement on T&E or mortgage attach or any contribution from leads or other ancillary revenue streams, which we view as incremental growth levers in our business beyond the housing recovery. I also want to emphasize that this is not guidance, but these scenarios should help provide a range of expectations around the earnings power of our combined company, simply from an eventual recovery in existing home sales and once we've realized our cost synergies. Specifically, assuming the housing market remains flat at 4.1 million existing home sales, we would generate roughly $1 billion in adjusted EBITDA and $750 million in unlevered free cash flow. In the next scenario, which we've assumed as 4.8 million existing home sales for this analysis, we would generate $1.5 billion in adjusted EBITDA and $1 billion in unlevered free cash flow. At mid-cycle levels of 5.5 million home sales, we would generate $2 billion in adjusted EBITDA and $1.5 billion in unlevered free cash flow. And lastly, we also provided an upside scenario of 6 million home sales. And at those levels, we would generate $2.5 billion in adjusted EBITDA and roughly $2 billion in unlevered free cash flow. So what you can hopefully see from this analysis is that, one, even at 4.1 million existing home sales, which we believe is the trough of the cycle, we could -- we would expect the business to generate $750 million in unlevered free cash flow, giving us confidence that we can make progress in reducing leverage even in conservative scenarios. And two, once we begin the recovery up to mid-cycle levels, that the earnings growth and free cash flow potential in this business is incredibly significant. Now I want to end by talking about our AI strategy. Last quarter, I touched on our 3 defensive pillars around AI. This includes: one, our growing base of proprietary data from our 3-Phased Marketing listings, which cannot be scraped by foundational AI models. Two, trust, which we believe will become even more important in a world where AI agents will bring inaccurate and fake information into the market like fake offers, fake listings, fake accounts, fake pictures, fake renderings, I'm already starting to see it. In this future, human validation will continue to be important given the high stakes, high-ticket transaction. Trust will matter even more than before. Three, positive network effects that our 330-plus thousand real estate professionals will create to continuously improve our Agentic AI capabilities on the platform. Combined, we believe we have the attributes required to evolve with the AI landscape. And despite all the fears around AI, the data indicates that agent utilization is now at the highest level in recorded history. Per NAR's annual consumer profile, 91% of home sellers and 88% of homebuyers choose to use a real estate professional to complete their transaction in 2025. I want to reiterate that, that is the highest level that we have ever seen in record history. Moreover, we're seeing the lowest level of for sale by owner listings in record history at just 5%. So even with AI making significant progress in the last 2 years, we're seeing an increase in the number of people using agents and a decrease in the number of for sale by owner listings and both at historic levels. So the data I just shared, 91% of home sellers using an agent and 88% of homebuyers using agents, that compares to a similar 90% of home sellers using an agent in 2024 and 88% of homebuyers using an agent in that period as well. And if you go back in time to 2005, what you see is 85% of home sellers using an agent and 77% of homebuyers using an agent. What this data is showing is that greater access to information or better search capabilities is not the reason why consumers choose to work with an agent. But rather, it's the agent's critical role in managing a highly complex and a highly emotional transaction. One where trust matters, where it's high stakes, high value. I cannot overstate how emotional these transactions and negotiations can become. The localized nuances that are prevalent in real estate are abundant and the nuanced deal process where no deal is the same as another is why people use a real estate professional. Moreover, what history shows is that as information becomes more prevalent as it did with the rise of the Internet from that 2005 period, where less buyers and sellers were using an agent. As the information becomes more prevalent, where more information and data has been out there over the last 2 decades. With that -- with more information, you see a greater need for the average consumer to feel like they need to hire a professional to make sense of all the information and all the data. Said simply, history shows that more information and more data in the public domain increases the demand for advice from a real estate professional. So now let me take a moment to speak about what we are doing to position ourselves and our business offensively for the AI opportunity. First, we are using AI to reduce OpEx, as you would expect. In Q1 alone, our internal initiative to train Compass and their 2,300 employees on how to best use AI tools has freed up an estimated $2 million of resources by deploying targeted AI workflow automations across support, compliance and brokerage operations, and the team has identified potential annualized efficiencies in the vicinity of $23 million as part of our overall cost synergy goal. Furthermore, we are transforming our engineering organization by successfully deploying AI coding assistance and automated testing frameworks organization-wide. We now estimate that 30% to 40% of all new code written at Compass is produced by AI, which is helping accelerate product development velocity by 20%, while keeping our technology OpEx unchanged even as we upgrade the platform for the Anywhere integration. Second, on productivity, we can help our real estate professionals, title agents and mortgage loan officers within our ecosystem become even more efficient and gain an edge in the market by using AI. For real estate professionals, we are fully integrating Compass AI 2.0 into their workflow to create an on-demand partner designed to help unearth business opportunities and streamline their daily workflows. Examples include a newly rolled out suggestion model, which suggests new steps an agent should take with their client to move their transaction along or proactively serving up buyer and seller leads through what we call our structural advantage tools, such as reverse prospecting, make and sell or the network tool to help a listing agent close a transaction faster. By giving our 330,000-plus real estate professionals these insights and reducing the number of manual tasks they perform each week, we are enabling them to service, win and close transactions faster. For our title agents, we are planning to leverage our significant data advantage now created by the Anywhere transaction to execute a targeted local sales approach. By layering predictive analytics into our one-click title and escrow integration, our title agents will be able to identify and intercept high probability transactions with greater precision, which we believe will improve our attach rates. For our mortgage loan officers, we can plan to apply similar predictive AI principles to capitalize on our expanded mortgage coverage. By utilizing our platform's proprietary transaction signals, we can provide loan officers with what we believe are highly qualified, highly high-intent leads exactly when a client needs financing, giving them an edge to win the business. Ultimately, we believe AI will be an accelerant to how much business our professionals do, and we are confident that we have the assets to help them win. With that, I will now hand it over to Scott. Scott Wahlers: Thanks, Robert. I want to start by saying thank you to our consolidated team for the extraordinary effort and collaboration put in over the past 4 months, which has led to the great results we're sharing today. With the Anywhere transaction closing on January 9, Q1 was truly a transformational quarter for our company. Where possible, I'll provide some information about the contribution to our consolidated results from the acquired Anywhere businesses. However, we're integrating the entities quickly and therefore, do not generally expect to break out separate results going forward. Please note that beginning this quarter, we'll also be providing additional information on an operating segment level. Our 3 operating segments going forward will be brokerage, franchise and integrated services. The Brokerage segment includes the results of our owned brokerage operations that now include the Coldwell Banker, Corcoran and Sotheby's International Realty brands. The franchise segment includes the results of the franchise brands we just acquired through the Anywhere transaction as well as the Christie's International Real Estate franchise we acquired in January 2025. The Integrated Services segment includes the results of our joint title and escrow operations as well as the operations of the Cartus relocation business that came through the Anywhere transaction. The Integrated Services segment also includes the equity method income from our 49% owned mortgage joint ventures, including the guaranteed rate affinity JV from the Anywhere transaction and our Origin Point JV. While certain direct expenses are allocated to each of the 3 operating segments, there are additional expenses that are not allocated to any of the operating segments because they relate more to the corporate entity or because they are shared across multiple or all of the operating segments. These include expenses related to our technology, finance, legal, human resources and executive functions. Therefore, the total adjusted EBITDA for the consolidated company will be equal to the total of the segment adjusted EBITDA results for our 3 operating segments, less the unallocated corporate expenses. We've reclassified our prior year results on the same operating segment basis for consistency with the current period presentation. With all that said, revenue in Q1 reached $2.7 billion, at the upper end of our revenue guidance range of $2.55 billion to $2.75 billion. Excluding the Q1 revenue contribution from the Anywhere transaction of about $1.2 billion, revenue increased 10.9% year-over-year. We are very pleased with this result as Q1 was a tough year-over-year quarterly comp in 2026 as on a Compass stand-alone basis, we grew organic revenue in Q1 2025 by 14.6% compared to Q1 of 2024. Brokerage segment revenue was $2.467 billion for Q1. On a pro forma basis, Brokerage segment revenue increased 7.1% in Q1 2026 compared to Q1 2025. Gross transaction value for the Brokerage segment was $97.3 billion in the first quarter. On a pro forma basis, brokerage segment GTV was up 7.3% year-over-year, a favorable comparison to the market that was at 1.5%. On a consolidated basis, including Anywhere, our average selling price was $978,000 for the quarter, representing a decrease of about 8% from a year ago as Anywhere's brokerage business has slightly lower average selling prices. Commissions and other related expense as a percentage of our brokerage segment revenue improved to 81.4% for the quarter. compared to 83.2% in Q1 of last year as Anywhere's brokerage operations operate with slightly lower commission rates than Compass' brokerage operations. On a pro forma basis, commissions and other related expenses as a percentage of our brokerage segment revenue was 81.3% in Q1 compared to 81.0% in Q1 of last year. Pro forma franchise segment GTV was up 4.6% year-over-year compared to a housing market volume that was up 1.5%. And finally, pro forma integrated services revenue grew 11% year-over-year with title and escrow revenue being the primary driver. Our total non-GAAP operating expenses were $641 million in Q1, an increase from $236 million of OpEx in the year ago period, driven by the operating expenses assumed in the Anywhere transaction. Note that this OpEx figure for Q1 of $641 million excludes Anywhere's expenses for the first 8 days of the quarter prior to the transaction closing or about $40 million of expense. Adjusted EBITDA for Q1 was $61 million, a record level of adjusted EBITDA for any first quarter period in our history, exceeding the high end of our $15 million to $35 million guidance range and a strong improvement of 280% from adjusted EBITDA of $16 million a year ago. Last quarter, I talked about the impact of Anywhere's long-term incentive plan, or LTIP, which is comprised of cash settled RSUs that require mark-to-market accounting through the P&L. The run-up in Anywhere stock price at the end of 2025 led to higher operating expenses in the P&L. And since these LTIP awards started to be indexed off of Compass' stock following the closing of the merger, we expected that elevated level to continue into Q1, which is built into our Q1 guide. However, given the decrease in Compass' stock price from the time we issued our Q1 guidance in late February to the stock price as of March 31, the actual expense from the LTIP wound up being $19 million lower than expected, which benefited adjusted EBITDA in Q1. Even after excluding the $19 million benefit from the LTIP, adjusted EBITDA would have been $42 million. This result still exceeded the high end of our adjusted EBITDA guidance range in the quarter, driven by higher-than-expected revenue and some other favorability in operating expenses, including slightly better realization of our cost synergies in the quarter. Several items are excluded from adjusted EBITDA as follows: First, during the quarter, as expected, we incurred $183 million of transaction and integration expenses related to the Anywhere transaction. This includes expenses such as investment banking, legal fees and severance costs, including $61 million of stock-based compensation expense, primarily related to the change of control severance provisions from Anywhere's former executives. We do expect additional expenses in this line item throughout the year as we continue our cost synergy and integration efforts, but not near the level seen in Q1. Second, you'll notice an elevated level of noncash depreciation and amortization expense this quarter at $163 million, up from $29 million a year ago. This increase is driven by the additional intangible assets and fixed assets we assumed in the Anywhere transaction, and this level of noncash depreciation and amortization expense will continue in the future. Third, stock-based compensation expense in the quarter was $47 million, excluding the aforementioned $61 million day 1 charge related to Anywhere's former executives. Last quarter, I guided you that you should expect stock-based compensation on a consolidated basis will not exceed $50 million in any future quarter beginning in Q2, and that continues to be our expectation. And finally, during the quarter, we recognized a $401 million onetime noncash deferred tax benefit related to the reversal of valuation allowances on our deferred tax assets. This reversal was related to the establishment of deferred tax liabilities for the recognition of intangible assets from the Anywhere transaction that are nondeductible for tax purposes. This $401 million deferred tax benefit offset the other noncash expenses and actually pushed us into a GAAP net income position this quarter of $22 million compared to GAAP net loss of $51 million a year ago. Our basic weighted average share count for the first quarter was 734 million shares, just slightly above the guidance range of 720 million to 730 million shares. And as expected, free cash flow was negative at $168 million in the quarter, driven by the Anywhere transaction and integration expenses, including the transaction costs incurred by Anywhere prior to the closing of the transaction that were paid on or subsequent to the closing date. That said, we ended the quarter in a strong cash position with $484 million of cash on the balance sheet, an increase of $285 million from year-end. Cash increase was driven by the $880 million in net proceeds from the convertible debt offering, offset by the use of $345 million in the Anywhere transaction related to the payoff of the revolver, net of cash acquired from their balance sheet. At the end of Q1, we had no outstanding borrowings on our $500 million revolver, and we remain well within our net leverage ratio covenant, which is the primary financial covenant on the revolver. As Robert touched on earlier, we have continued to make strong early progress on cost synergies. We have already actioned over $250 million of our cost synergy target, which was previously our year 1 target. As a result, we've now increased our year 1 action target from $250 million to $300 million and raised our 3-year action target from $400 million to $500 million. Furthermore, last quarter, we guided to an expectation to realize about $100 million of cost synergy in 2026, but that we now expect to realize about $200 million in 2026. About 2/3 of this amount or $130 million will be reflected as reduced operating expenses in 2026, benefiting adjusted EBITDA and cash flow and the remaining 1/3 or about $70 million will be reflected as lower CapEx, which won't directly benefit adjusted EBITDA, but will benefit free cash flow. As I discussed last quarter, the reason why a portion of the cost synergies will be realized through CapEx is because Anywhere historically capitalized a large amount of employee and contract labor to its balance sheet, approximately $80 million in 2025. And as part of our cost synergy work, a significant portion of Anywhere's technology projects that had historically been subject to capitalization will be cut as we shift the technology focus to the Compass platform. Importantly, as we've already made significant progress on the CapEx portion of our synergies, the vast majority of future actions over the next 3 years will generally all benefit the P&L and adjusted EBITDA. Now turning to financial guidance for Q2. For the second quarter of 2026, we expect consolidated revenue in the range of $4 billion to $4.2 billion. We expect second quarter consolidated adjusted EBITDA to be in the range of $310 million to $350 million. For the full year, we expect non-GAAP operating expenses in the range of $2.7 billion to $2.75 billion when considering the actual OpEx of $641 million for Q1. Included in the full year OpEx range is the 3% to 4% OpEx inflation we typically expect and the $130 million of the OpEx synergies we expect to realize through the P&L. On average, the OpEx for Qs 2, 3 and 4 reflects a step-up from the OpEx level of $641 million for Q1 for a few reasons. First, OpEx in Q1 excluded 8 days of Anywhere's operating expenses due to the transaction closing on January 9. Second, our annual employee compensation adjustments occur at the end of March, leading to a step-up of these payroll expenses starting in Q2 of each year. And offsetting these natural increases would be the higher P&L realization of synergies in the second, third and fourth quarters compared to the cost synergy realization in Q1, which was lower. We expect our weighted average share count for the second quarter to be between 755 million to 760 million shares. This is a step-up from Q1 as the shares issued for the Anywhere transaction were only weighted for the period post closing January 9. Finally, a few thoughts on cash flow and debt levels. As I talked about last quarter, we fully expected to report negative free cash flow in the first quarter from the Anywhere transaction and integration cost spend. We expect to be free cash flow positive for the balance of the year. However, Q2 could be close to free cash flow breakeven or maybe even slightly negative based on the timing of severance and other payments to achieve our cost synergies, the timing of the semiannual interest payments on our debt, which are concentrated in the second and fourth quarters of the year and the timing of certain legal payments related to Anywhere, including the $54 million NAR related class action settlement that is still open and expected to be paid in the near term. That said, we expect to deliver strong free cash flow in Q3 and Q4 of this year, which should put us in a cash position to deliver positive free cash flow on a full year basis and give us a clear path to prioritize aggressively delevering our balance sheet, which remains a high priority for us. Our first target in delevering is the highest cost tranche in our capital structure, the $500 million of 9.75% notes. These notes can't be prepaid today and will first become callable on April 15, 2027. The bonds will carry a redemption premium of 4.78% over par. And while this redemption premium will cost us $25 million in cash, it will save us nearly $50 million in annual interest cost. So it's a good use of cash. So April 15 of next year is circled on our calendar and assuming cash flows materialize as we expect, we'll be taking out the full tranche of the 9.75% notes in Q2 of next year. In the meantime, we'll build cash on the balance sheet while earning mid-3% returns in short-term treasuries. To wrap up my comments, in early April, Moody's and S&P initiated credit ratings on Compass. As prior to this point, Compass had no debt and therefore, had no credit ratings. Their respective reviews concluded a month ago, and S&P initiated a B+ corporate rating and Moody's initiated a B2 corporate rating and each issued positive outlooks on Compass Inc, which were upgrades from where Anywhere was rated on a stand-alone basis before the transaction. Additionally, ratings on the outstanding bonds were each upgraded between 2 to 3 notches. We're pleased to see that 2 of the big 3 credit rating agencies have come out with positive outlooks on the cash flow generation capabilities of Compass and Anywhere on a combined basis. Before I turn the call over to begin Q&A, we'll be attending the BTIG Conference on May 7 and the JPMorgan TMT Conference in Boston on May 18, and hope to see you there. Soham Bhonsle: [Operator Instructions] Thank you, everyone. This is Soham. For the Q&A portion of the call, we're going to take questions that we received by e-mail in the text box. And apologies again for the technical difficulties. So I guess the first question is from Jason Helfstein from Oppenheimer. How should we think about the timing of Anywhere's agents getting access to the Compass technology platform? And what do you expect in terms of adoption rate? Robert Reffkin: Thank you for the question. The Anywhere owned brokerage will get the technology starting next month and then more in each month following with everybody getting it by the first week of September, if not earlier. everyone in the owned operations. The franchise affiliate business will start getting it in January, and it will be released over the following 2 months as well, so in advance of the spring market. Soham Bhonsle: Great. The second one from Jason is, have you seen the uptick of 3-Phased Marketing since you settled with Zillow and launched the Redfin partnership? Robert Reffkin: Yes, we've seen an uptick in the 3-Phased Marketing. It's been modest as the -- you're in the middle of the spring market when usually it's more towards the third phase, but we've definitely seen an increase. Our coming soon went from, I think it was low 20s to mid-30s, and I expect it to be much higher in the months ahead. My expectation is that coming -- that 80% of our listings will go through the coming soon phase. Extension comes from where before the restrictive rules that were put in place, i.e., clear cooperation, we had 90% of our listings start off as coming soon. Soham Bhonsle: Okay. Next one is from Dae Lee from JPMorgan. You've gone from managing one brand to multiple brands across own brokerage and franchise network. That's now larger than your brokerage by transaction volume. That's a step change in complexity. What's the tangible benefit of maintaining distinct brands and catering to fundamentally different needs of agents spanning different brands and models? Robert Reffkin: Yes. So I think part of your question is the answer. Our customers are agents, right? You said agents have different needs. And so we need to serve those needs. And one of the needs that people have is a desire to have a local culture, local traditions, local beliefs and a local unique brand. And so this allows being able to support different brands allows us to serve more agents in the markets that we're in. And again, if our customers are agents, the -- I don't think I've heard an agent say they want us to merge all the brands as an example. But I have heard agents say that they want us to maintain their brands and we've given them that commitment. The technology platform is -- the reason why it's taking the time it is taking to roll out is half of the reason is so that it can work in a brand-agnostic way. And with that flexibility that we're bringing frankly just towards the summer, it can serve different brands without any more investment. And the same way Shopify is able to support a bunch of different brands, our platform should be able to support brands as well. Soham Bhonsle: Okay. The second one from Dae Lee is how much incremental synergy opportunity remains beyond the $500 million? Robert Reffkin: There is -- yes. I'll just -- yes, I'll start and I'll pass it on. There is incremental opportunity, but I wouldn't expect another increase in any time in the near future. Scott Wahlers: Yes. I was going to follow up with the same thing. I mean to say, we moved very quickly in these first 100 days since closing the transaction. We wanted to make a big impact early on just for the clarity of the organization and moving forward. And so as we get into the next phase of the synergies, we're getting into the deeper operational type integrations. And so we've got the runway to complete the rest of that phase, which we've clearly derisked ourselves with the great progress we've made to date, but we would not expect to be raising that target anytime soon. Soham Bhonsle: Great. Next is from Ryan McKeveny at Zelman. The first one is on the synergies target and increase in the target of $500 million, can management drive -- dive into the primary areas of cost savings, presumably from a combination of leases, headcount, tech development. Should we think about the mix of those big buckets and what categories of expenses is the drivers for the incremental synergy? Scott Wahlers: Just repeat last... Soham Bhonsle: Okay. I'll repeat it again. So on the synergies target and the increase to $500 million, can management dive into the primary areas of cost savings presumably leases, headcount, tech and development, how should we think about the mix of those big buckets? Scott Wahlers: Yes. Look, the reality is nothing has changed in terms of the buckets. I mean those big buckets were there. The reality is what's changed is more time has elapsed. We've had more ability to get into the details. And just to kind of like recap it, when we first put out the $225 million, that was at the time of announcement back in September of last year before we had any opportunity to get into the details, right? We increased that again to $300 million when we started doing some pre-close planning work, gave us more confidence of increasing that. The buckets didn't change then either. We just had more confidence on the total. We increased it to $400 million in February after we had 7 weeks of actual progress working with the leadership team of Anywhere and Compass coming together. And then after now having almost 4 months completed since we closed the transaction on January 9, it's just that much additional confidence. I mean I think the one thing I'd add that is why we're seeing such good progress here is that the management teams are really working very well together. In a typical situation, I think you often have the target comes in, makes a lot of changes, makes decisions. And this has been a much more collaborative approach with the Anywhere and Compass management teams working really closely with each other, and I think it's been a good contributor of the reason for our success. So it's not really any new buckets. It's just really kind of, I think, a team that's working really well together and making good progress towards the original goals. Soham Bhonsle: Okay. Great. The next question is also from Ryan. On the recent announcement with you and TPG and the stake in Peerage, firstly, can you give some context on the dynamics driving that transaction in terms of how that impacts the model? Does the ownership structure change? And just how does it sort of flow through the P&L? Scott Wahlers: Yes. Look, on the Peerage transaction, it's really a positive transaction for us. Peerage one of the key franchises under the Sotheby's International Realty brand, and it's an important relationship for us. They grew quickly through M&A prior to when mortgage rates spiked. This is going back into the early 2000s or 2020s, I should say. And so they just got into a situation where they were overlevered, took out too much debt as a result of their expansion and just had trouble keeping up with the debt payment. So it's a good business. It's fundamentally a good business. They just got overlevered on debt. So this transaction allowed them to restructure their finances, clean up their balance sheet and that puts them on the right path going forward. So we pick up a 51% common ownership interest in this transaction. They're back on being cash flow positive. Nothing changes from the standpoint of how those revenues will flow through our business on the franchise side. That will stay coming through franchise revenue going forward. And as we talked about, in the announcement, we kind of restructured some amounts they owed us from some royalty payments they were behind on. And so we'll get those paid back just over a little bit longer period of time that we'll provide. So overall, a net positive transaction for us. Soham Bhonsle: Great. Next one is from Alec Brondolo from Wells Fargo. Could you speak to the cost buckets that drove the increase in the 3-year synergy target from $400 million to $500 million? How much of the $130 million in anticipated P&L cost synergies will be realized in the first half of the year relative to the second half? And could you speak to the learnings of the Anywhere franchise business since the acquisition closed? How are you thinking about bringing technology and the best practices to the franchisees? Scott Wahlers: Maybe I can start with the synergies question. On the synergies, I think if you think about the $130 million that will be realized through the P&L in 2026, about $10 million of that was realized in the first quarter, just given timing of the actions in relation to Q1. So that by default puts the remaining $120 million coming forth in Qs 2, 3 and 4. If you just divide that up at $40 million even. I'd say you could assume a little less than that average of $40 million in Q2 and a little more of that average in Q4 as a lot of the synergies are action now. They'll continue to build in terms of realization through the quarters of the year, and we still have another $50 million to go. And so that's a good way to kind of frame how that's going to come through the P&L. Robert Reffkin: In terms of franchise, historically, our company served real estate professionals with agents and with the goal of making them more profitable, serving them as entrepreneurs, helping them realize their entrepreneurial potential. Now we have a second customer base as broker owners, which are the franchise affiliate businesses. And they have the exact same goals as the real estate agent, which is to become more profitable to realize their entrepreneurial potential. And we are giving them the same advantages that helped Compass grow. We're giving them as broker owners to help them grow. Obviously, it's the technology platform as one example, but also our enterprise sales team that recruits agents, our M&A team. So we are giving them both on the revenue side and the cost side, the same advantage that Compass had at a brokerage level, we're giving that to the franchise broker owners so that they can be more profitable businesses. Soham Bhonsle: Okay. Great. The second one from Alec is, how should we be thinking about the size of the Anywhere agent base that has a low amount of GCI? How long do you anticipate attrition from that group of users that will last? Scott Wahlers: On the -- go ahead Rob, do you want to take that? Yes. I was going to say on the agent base, I mean, I think the important point that we wanted to call out there is that the attrition during the quarter, a significant percentage of that was really kind of underperforming or nonperforming agents. 56% of the agents we shed had 0 production. Another 21% on top of that had production of $20,000 or less in the past 12 months. So these are reductions of numbers of agents but really having no impact on the business. On the Compass side, over the last several years, we've kind of really operated under this methodology of kind of focusing on the strong producing agents and the underperforming agents, if they pay their fees and they are otherwise in good standing with amounts owed to the brokerage, we'll keep them on. But if they're not producing and they're not paying bills as due, we'll move them out of the business. And so Anywhere is now operating in that same capacity in recent periods of time, and I think they're just catching up to us a little bit. So it's good to see we're both aligned on that strategy. It's the right strategy. So there might be a little bit of more choppiness over the near term on that, but it's not going to be -- the important thing is that we're just dropping numbers of agents. It's not dropping any production at all. And that's the main goal. As we've always said before, there's been this limitation with principal agent counts and total agent counts that not all agents are created equal. Even when we used to report principal agents on the Compass side, one principal agent could be operating as an individual contributor, another principal agent could have a team of dozens of agents doing extremely high production. So there are limitations to that metric on a principal agent basis, and there's also limitations on that on a total agent basis. But the important thing we wanted to get out there is that the lost agent counts really had very, very limited production associated with them. So no meaningful impact on the business. Soham Bhonsle: Great. All right. Next one is from Bernie at Needham. With the guidance, can you provide some color by revenue buckets? How should we expect seasonality throughout the year? Are there any differences than typical housing market seasonality? Robert Reffkin: Could you repeat the last part... Soham Bhonsle: With the guidance, can you provide some color by the revenue buckets? How should we expect seasonality throughout the year? Is there any difference in housing -- difference in the housing market seasonality? Scott Wahlers: It's probably going to be pretty similar. A lot of the GTV coming through franchise will follow similar to the brokerage seasonality. And so I'd expect those two to be fairly aligned. And you can actually see, just as a reminder, we put on our on our website through the investor deck, we provided today the pro forma revenue for 2025 as though Anywhere and Compass were combined from the beginning of 2025. And you can see the breakout for the Brokerage Franchise and Integrated Services segment, separated for Compass, separated for Anywhere and then, of course, in total. So you have good visibility of what that looks like on a trailing 12-month basis to hopefully give you some sense as to what that trending could look like going forward. Soham Bhonsle: Great. So the next one is from Bernie as well. 84,000 agent count was lower than expected. I don't think we had the exact apples-to-apples comparisons with the principal versus nonprincipal agent count last quarter. How did agents trend quarter-over-quarter? Can you talk to agent retention? Scott Wahlers: Yes. I mean, look, I think we touched on that a little bit already with -- we had good recruiting we talked about the attrition and the portion of that attrition that was really kind of related to nonproductive agents. I think the gap to consider is that what we're talking about here with the 84,000 agents we're talking about owned brokerage agents, right? There's obviously a lot of agents on the franchise side of the house that we're not including in that count. That leads to our total, the 330,000-ish total count across the company, which includes international franchise. Soham Bhonsle: Great. Next one from Michael Ng at Goldman Sachs. What were the key sources of the upgraded synergy outlook given 3 quarters of upgraded synergy outlook? Could we expect further upside from here? And as a housekeeping item, how much in P&L synergies was realized in Q1? And do you expect -- and how much do you expect in Q2? Scott Wahlers: Yes. I think we covered that one as well in an earlier question. Again, about $10 million was realized in the first quarter, which is up a little bit from what we expected. And then that leaves you with about $120 million of P&L realization that will come through in the last 3 quarters of the year. I'd expect a little less than $40 million in Q2, about $40 million in Q3 and a little more than $40 million in Q4, if you want to kind of like phase that out that way. Soham Bhonsle: Okay. And this should be the last few questions here. So from Michael Rindos at Benchmark. Please discuss what's going on with private listings in Chicago -- in the Chicago MLS, sharing it nationally and Washington State, Wisconsin enacting laws around private listings. Robert Reffkin: Yes. So -- there are 2 types of laws that states are coming with. One is a model, which I believe is Wisconsin and Connecticut, where they're saying that if a seller signs that they don't -- that they want to be private listing, they can be private listing. So that actually means that some states are saying sellers have the legal right to be private listing and to market however they want. That's one model. I guess -- and well, there's 3 models. And the second model is one where the states aren't seeing anything. And the third model would be states like Washington state, where they're saying if a listing is marketed to some, it must be publicly marketed. But public marketing per -- at least per MLS is assigning the yard. And so what is public marketing? So is that saying if you're marketing to this private listing, you have to assign your yard? I'm not sure that's fine. Public marketing is put on social media. So is that state saying, if you have a private listing, you also on your social media, I think that would be fine. Is public marketing saying that you have the days on market or price drop history or a bunch of information. Public marketing could just be a picture of the house, the neighborhood and say, contact me, an agent, come to compass.com, we'll show you all these listings. And so in those states like Washington, they're saying if it's -- they're saying coming soon are perfectly legal and if nothing else, that it meets the requirement because clearly, it's a public marketing. And even private exclusives on compass.com, they're available per request. And so private exclusive is just a name, like private label for clothes, like private banking, like private equity, like private client group, it's just a name. Obviously, it can't be private because it's private -- you can't sell something to yourself, right? So what private exclusives are on compass.com, they're available by request, and they are publicly marketed. A different way to say it, Zillow bans private exclusives because they're public marketing. And even Zillow believes they're publicly marketed. And so that's what's happening in the state level. For MRED what we are bringing MRED national as well as it will be just a select number of MLSs that are pro seller choice, where we're going to give them all of our listings, where we're going to subsidize our agents joining. And the reason why it's not that I want to create a national MLS to replace local MLSs. I want to create a national MLS to compete against local MLSs because if they have to compete, who are they competing for? For us, for agents, agents deserve more choices. Sellers deserve more choices, not less. And so I think this is a very positive -- in the same way, look what we kicked off. Now you have Zillow previews and realtor previews and coming soon in all these sites. Didn't the seller deserve that 5 years ago and 10 years ago? Why didn't they have it? Shouldn't sellers have more choices, not less choices. And so what we are doing, we are pushing on the system so that sellers and agents have more choices, less mandates. The seller should be the only person that decides how they market their home in the context of the law. And fiduciary duty and statutory duty, which are a majority of states, say that the agent, the real estate agent has must -- and this is the law. MLS rules are just rules of a business, they're private entities. But the fiduciary duty of statutory duty says the agent must follow all lawful instructions of their clients. If a seller wants to market without days on market and price drop history, however they want, that is a lawful instruction. And MLS with restrictive rules should not be able to tell an agent that they cannot follow the law or if they don't follow the law, their sellers' instructions that they're going to be fined $5,000 and can lose their access. So I think I'll close with this. The dominant portal that likes banning agents for marketing outside of their platform to scare them from marketing outside of their platform, their tagline is we are trying to bring into the light these listings, bringing transparency into the light. Well, here's what we're bringing to light. We're bringing to light that sellers have been losing the disinterested advice of their fiduciary because of MLS fines and debarments. And we are bringing to the light that sellers should be -- with their agents should be able to decide how they market their home in any way they want, not third-party portals and third-party platforms like an MLS. The seller hired the agent and the broker firm the seller didn't hired MLS. The seller hired an agent. They didn't hire a portal. And again, I think that history will look back and they'll see that sellers will have more choices because of the efforts that we've been pushing forward. And I'm thankful for all of the agents and employees that have advocated for seller choice over the last number of years. Soham Bhonsle: Great. I think we will end it there. I know we went a little bit over. So again, thank you, everyone, for joining the call, and apologies for the technical difficulties. We are available tonight and over the next few days to answer any of the questions you may have. Thanks again for joining. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Hannah Jeffrey: This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 5, 2026. And with that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer. Waleed Hassanein: Thank you so much, Hannah. Good afternoon, everyone, and welcome to TransMedics First Quarter 2026 Earnings Call. As always, joining me today is Gerardo Hernandez, our Chief Financial Officer. Our vision has been bold -- our vision has always been bold and growth-oriented. Since inception, TransMedics has been relentless in our pursuit to transform organ transplant therapy by increasing utilization of donor organs and improving the clinical outcomes of transplant patients throughout -- through technology and service innovation and by disrupting the status quo. To accomplish this, we've been deliberate yet aggressive in our strategic investment in growth initiatives. We believe that 2026 is a critical and transformational year that stands to cement TransMedics' near, mid- and long-term growth trajectories and global market position. In the U.S., we're actively engaged in growing our heart and lung franchises by advancing our enhanced heart and DENOVO lung programs to expand our clinical evidence to support broader adoption. In parallel, we are also completing the development of the OCS Kidney platform using our Gen 3.0 platform. Our OCS Kidney platform will enable us to access the largest segment of the global transplant market, which is kidney transplantation. This will happen for the first time in the history of TransMedics. We strongly believe that once regulatory approvals are in hand, OCS Kidney will drive significant growth for our abdominal franchise. And we're not stopping here. We're also actively engaged in upgrading our heart, lung and liver devices to Gen 3.0 platform, which will enable us to gain significant future operating leverage and increase clinical adoption of the OCS platform in these critical organ transplant segments. Our growth initiatives also now go beyond warm perfusion. We recently unveiled the TransMedics Controlled Hypothermic Organ Preservation System, or CHOPS. CHOPS is designed to expand our product offering to cover new segments of the transplant market best served with cold static storage. And finally, our growth initiatives now extend beyond the U.S. to important international markets. In Europe, we are undertaking a bold initiative to replicate the NOP clinical service and transplant logistics model to catalyze European OCS adoption and potentially expand our total addressable market. I will provide details on each of these exciting initiatives on today's call. As you can see from our ongoing growth initiatives, our focus remains on long-term value creation with continued investment across each pillar of our growth strategy. Specifically, I want to highlight that this is a strategic and proactive decision, and we fully expect that our financial performance over the next several quarters will reflect these necessary investments in people, infrastructure and technology development as we capitalize on the opportunities in front of us. Based on everything we know today, we are highly encouraged and inspired by what's ahead for TransMedics. We are committed to executing our plan to drive significant growth for TransMedics and for the global transplant markets broadly. As I've stated repeatedly, I truly believe that TransMedics remain in the early innings of our long-term growth opportunity. I'm excited to report that our first quarter performance that reflects a strong start for 2026. Despite the broader volatility and the transient negative impact of the U.S. Transplant Modernization Act on OPO performance and the overall donor numbers in the U.S., we managed to deliver a solid quarter to start the year. Here are the key operational highlights for 1Q 2026. Total revenue for 1Q '26 was $174 million, representing approximately 21% growth year-over-year and approximately 8% sequential growth from 4Q 2025. U.S. transplant product revenue grew by 22% year-over-year and approximately 7% sequentially to $102 million, while OUS transplant revenue grew approximately 39% year-over-year and approximately 17% sequentially to $6 million. We delivered an adjusted operating profit of approximately $18.1 million in Q1, representing approximately 10.4% of total revenue in 1Q while continuing to make significant investment to fuel our growth. Importantly, we ended 1Q with $462 million of cash and cash equivalents, while making substantial investments in the growth initiatives above. TransMedics transplant logistics services revenue for 1Q 2026 was approximately $32 million, up from $26.1 million in 1Q 2025, representing approximately 22% year-over-year growth and up from $28.6 million in 4Q 2025, representing approximately 12% sequential growth. In Q1, we maintained coverage of approximately 82% of our NOP mission requiring air transport. We expect to maintain 22 operational aircraft in the U.S. fleet throughout 2026. As we discussed, we are now focused on maximizing the utilization of our U.S. fleet and improving efficiency and capacity by double shifting a portion of the fleet to meet the growing clinical demand. We will detail key findings from this initiative at year-end. Overall, we are pleased by our strong performance that was fueled by growing OCS case volume, increased clinical adoption. Importantly, we're also encouraged that we achieved these results without any contribution of ENHANCE and DENOVO clinical programs due to the enrollment timing of these important programs. Speaking of ENHANCE and DENOVO, let me shift to provide a detailed update on our strategic initiative to unlock these 2 important clinical programs to help us grow our cardiothoracic franchise in the U.S. At the recent ISHLT conference in April, we unveiled our TransMedics Controlled Hypothermic Organ Preservation System, or CHOPS. CHOPS is a true active cooling device designed to provide a variety of temperature conditions ranging from 4 to 12 degrees Celsius to meet the users' need. This represents a unique -- unique and optimized approach that we believe is superior to the Styrofoam boxes that are used for cold static storage of organs today. These boxes use face-changing material or cold packs that are extremely variable and are nearly impossible to control or adjust preservation temperatures with. CHOPS will be an FDA-registered and regulated organ preservation device made by TransMedics and will serve as the control arm of the ENHANCE and DENOVO programs once the IDE supplement is approved. This would be a huge strategic win for TransMedics as it stands to help avoid any reliance on competitive products as we conduct our important clinical programs for heart and lungs. We plan to file the IDE supplement within the next few weeks, and we expect this to be approved and implemented in early Q3 2026. Importantly, in parallel to these clinical programs, we fully intend to file a 510(k) application to clear this device for commercial use in the U.S. Once cleared by FDA, CHOPS would expand TransMedics' platform of organ preservation technologies and enable us to address shorter preservation times for organs that may be best suited for cold storage. As we highlighted on our last call, the panic and confusion caused by the competitive reaction to our clinical programs somewhat delayed our ENHANCE Part B and DENOVO enrollment. We not only addressed this challenge by introducing CHOPS, but we are now going after the niche market with superior, more validated cooling technology and our best-in-class NOP infrastructure. Said differently, beyond facilitating our trial enrollment, we are expanding our product portfolio to ensure that TransMedics is well positioned to provide transplant programs around the world with the widest range of products to meet their clinical needs across the full spectrum of organ transplantation. We plan to accomplish this goal based on best-in-class technologies, best-in-class clinical services and with the most cost-efficient and reliable logistical network in the market. Now let me move to share the -- share update on our strategic initiatives that we see as an important catalyst for our business. First is the National Transplant Modernization Act. In March 2026, TransMedics submitted our detailed comments on CMS proposed rule-making language for the new U.S. transplant system to advance U.S. transplant modernization initiatives. Our public comments focused on several key topics. First, on the system-wide benefits of allowing new entities with proper national infrastructure that are not current OPOs to participate in the new transplant ecosystem by becoming either a multiregional or even national OPOs. This is to help maximize U.S. donor organ utilization for transplants. Importantly, it will provide a mechanism for fair competition and maximize transparency while driving cost efficiency to the U.S. transplant ecosystem. Second, on the benefit of using FDA-approved portable perfusion technologies to maximize donor organ utilization in the U.S. while limiting the use of unproven, fairly expensive and potentially detrimental techniques that were organically introduced into the market over the last several years. Third, on the benefits of enabling for-profit entities to participate so long as they are strictly adhering to all performance metrics proposed by CMS and complying with all the financial disclosure requirements. Fourth, on the benefits of allowing new entities to bid to replace as many of the decommissioned OPO regions as they can support. And finally, we highlighted the potential benefits of requiring these new participating entities to provide technology and clinical support services to existing OPOs. Again, our proposal was to -- it was intended to maximize the benefits to the U.S. transplant ecosystem in general and not just to one entity. If CMS agrees with this direction, TransMedics fully intend to submit bids for donor service areas or DSAs associated with decommissioned OPOs later this year or early next. Again, our goal is to drive efficiency, transparency, maximize patient access and organ utilization for transplant in the U.S. The second growth initiative is NOP Europe. As we've discussed, we are actively building infrastructure and staffing in Italy across 4 hubs to cover Northern and Southern Italy. Meanwhile, we're actively engaged and applying for Italian organ transplant air and ground logistics tenders for a few Italian regions as we speak. We are also actively engaged with Benelux region stakeholders to establish NOP in the Netherlands and Belgium to create NOP hubs that are staffed by a dedicated clinical TransMedic staff to manage OCS cases in these countries. Another important element to our European NOP strategy is to create the first ever dedicated and integrated transplant logistics network to cover the broad European transplant logistics demand. On that front, we announced last week that we've entered into a definitive agreement with a major European charter flight operator, PAD Aviation, or PAD to partner on creating this European air logistics network. PAD is located in Paderborn, Germany, which is within 1- to 2-hour distance from all the major transplant hubs across Europe. Importantly, they are operating a fleet of same model aircraft that we use in our U.S. fleet, Embraer Phenom 300Es. Simply stated, we're planning to replicate the success of the U.S. NOP in Europe to potentially expand or nearly double our total addressable market, increase OCS clinical adoption and provide efficient and dedicated transplant logistics service across Europe using our dedicated logistics network. The third growth initiative is OCS kidney program. As we discussed on the last call, this represents our next frontier with kidney expected to be the first organ to launch on our OCS Gen 3.0 technology platform. Gen 3.0 technology platform will comprise a completely redesigned form factor, hardware, software and perfusion system that is smaller, lighter with lower part count, purposely designed for automated assembly and high reliability. Currently, the development program is running at full speed, and we hope to introduce the final design device and potentially working device at the American Transplant Congress in Boston in late June. Looking ahead, we are still targeting early 2027 for our U.S. IDE submission for our kidney program. We are extremely excited about this program as it stands to unlock a substantial incremental market opportunity measured in tens of thousands of kidney transplant procedures globally. The fourth growth initiative is OCS Technology Gen 3.0 upgrade for both liver, heart and lung systems. This program is running in parallel to the kidney program to bring significant technology upgrade to our current liver, heart and lung systems and help catalyze our clinical adoption in these transplant segments. Again, we are intentionally developing our Gen 3 platform to gain supply chain and operating leverage with lower part counts and less reliance on critical third-party suppliers. As you can see, our growth strategy is multifaceted with catalysts lined up across the short, mid and long terms. We're excited and laser-focused on investing to ensure the successful execution of these initiatives throughout 2026 and beyond. Now let me conclude by stating that based on all the dynamics we see today, both in the U.S. transplant ecosystem and at the macro level, we are reiterating our revenue guidance for the full year 2026 between $727 million to $757 million, representing a 20% to 25% growth over full year 2025. We may revisit the guidance later in the year as we gain more visibility on the pace of ENHANCE and DENOVO enrollment and other dynamics in the U.S. transplant ecosystem. With that, let me turn the call to Gerardo to cover the detailed financial results for the quarter. Gerardo Hernandez: Thank you, Waleed. Good afternoon, everybody. I am pleased to share TransMedics first quarter 2026 results. Please note that a supplemental slide presentation with additional details is available in the Investors section of our website. As Waleed highlighted, we started 2026 with solid execution and continued momentum across our platform. Importantly, consistent with the priorities we highlighted on our previous earnings call and throughout 2025, Q1 also marked the beginning of an accelerated phase of investment and execution for TransMedics. We are advancing multiple initiatives designed to support future growth, strengthen our operating capabilities and position us to capture the opportunities ahead. These include continuous progress across our different programs, international expansion efforts, shops and as announced last week, our agreement to invest in PAD Aviation to support the development of a dedicated organ transplant logistics network in Europe that Waleed mentioned before. Together, these initiatives and these actions demonstrate our ability to move quickly and boldly in allocating capital to execute on strategic opportunities that we believe can further fuel long-term profitable growth. And as Waleed says, let me repeat, these actions are designed to further fuel long-term profitable growth. Beginning Q1, we are introducing certain non-GAAP financial measures, including adjusted R&D expense, adjusted SG&A expense, adjusted operating expenses, adjusted income from operations, adjusted net income, adjusted diluted earnings per share and adjusted operating margin. We use these non-GAAP financial measures to support financial and operational decision-making and to evaluate period-to-period performance. We believe these measures are useful to both management and investors because they provide meaningful supplemental information regarding our core operating performance, particularly as we begin to incur certain discrete expenses and because they offer greater transparency into the key metrics management uses in running the business. Examples of these discrete expenses include costs related to strategic initiatives, corporate development activities, headquarter relocation and the implementation of our new ERP. A reconciliation between GAAP and non-GAAP results is included in the supplemental materials available in our website. Now turning to our Q1 financial performance. Total revenue for the quarter was approximately $174 million, representing 21% growth year-over-year and 8% growth sequentially. Growth was led by strong liver performance, continued progress in heart and increasing contribution from our integrated logistics platform. U.S. transplant revenue was approximately $167 million, up 20% year-over-year and 8% sequentially. By organ, liver contributed with approximately $139 million, heart with approximately $26 million and lung with approximately $2 million. International revenue was approximately $5.6 million, up 39% year-over-year and 17% sequentially. International revenue growth was primarily driven by heart with smaller contribution from lung. We are encouraged by the progress we are seeing internationally as we continue to build our presence and advance our expansion plans. At the same time, the business remains at an early stage and quarterly variability is expected due to reimbursement and market dynamics. Total product revenue for the quarter was approximately $108 million, up 22% year-over-year and 8% sequentially, reflecting continued strong liver performance and modest growth in heart. Service revenue for the first quarter was approximately $66 million, up 19% year-over-year and 9% sequentially. Growth was driven primarily by logistics revenue, supported by increased utilization of the TransMedics aviation fleet. Together, these results reflect continued demand for the OCS platform and the value of our integrated NOP model. Total gross margin for the first quarter was approximately 58%, broadly consistent with recent quarters and down approximately 331 basis points year-over-year. The year-over-year decline was driven primarily by increased internal supply chain activity to replenish inventory across our hubs and position inventory in support of the DENOVO and ENHANCE programs as well as continued investment in NOP network, which together with certain onetime items impacted the margin, and we will expect this to normalize in the coming quarters. Sequentially, as mentioned before, gross margin remained broadly stable at approximately 58%. Underlying performance in the quarter was encouraging with operational improvement largely offset by ongoing internal supply chain costs to support the DENOVO and ENHANCE programs continued investments in NOP capabilities and certain onetime items that we will expect to normalize in the coming quarters, as mentioned before. Adjusted operating expenses for the first quarter were approximately $83 million, up approximately 42% year-over-year and 17% sequentially. Adjusted R&D increased approximately 45% versus the first quarter of 2025, primarily driven by the continued development of our OCS kidney program and our next-generation OCS platform. The increase also reflects ongoing product development activities in Mirandola, Italy and headcount growth as we continue to strengthen our development capability across U.S. and the Mirandola site. Sequentially, the increase in adjusted R&D was primarily driven by continued investment in OCS Kidney and our next-generation OCS platform with a smaller contribution from increased product development activity in Mirandola. Adjusted SG&A increased approximately 41%, primarily reflecting the continued investment to strengthen NOP network and IT capabilities, the initial impact of our new headquarter in Sommerville and consulting and market research in support of international expansion plans. Some of these factors also drove the sequential increase, particularly continued investment in NOP network and international expansion initiatives. Adjusted income from operations for the quarter was approximately $18 million, representing an adjusted operating margin of approximately 10%. The year-over-year decrease in operating margin primarily reflects the timing and scale of our planned investment in 2026 as well as the gross margin dynamics discussed earlier. Adjusted net income was approximately $11 million or $0.30 per diluted share. As Waleed mentioned before, we ended the quarter with approximately $462 million in cash. Cash generation from operations remained solid during the quarter, and our balance sheet remains strong and continues to provide us with the flexibility to invest in the business, support our clinical and international expansion plans and evaluate strategic opportunities that we can -- that can strengthen our platform. Now turning to our 2026 financial outlook. We are reiterating our full year 2026 revenue guidance of $727 million to $757 million, representing a 20% to 25% growth over full year of 2025. We continue to expect growth to be driven primarily by increased transplant volume supported by OCS and NOP platforms, expansion of service revenue and progress across our clinical and international initiatives. In terms of gross margin, we continue to expect our long-term gross margin profile to remain around the 60%. As I shared before, as we continue to invest ahead of growth and expand geographically, we do expect some near-term pressure. We feel confident in our long-term profitability goals. As we continue to scale the business, we expect to capture additional operating leverage while also benefiting from initiatives that are planned to be margin accretive over time, including our kidney program, our next-generation OCS -- and our next-generation OCS. Taken together, these factors reinforce our confidence in the long-term profitability of the business. And again, as Waleed said, let me repeat, taken together, these factors reinforce our confidence in the long-term profitability potential of the business. In terms of capital allocation, our focus remains on driving long-term value. We are concentrating our investment in 3 key areas: first, fueling growth through continued R&D investment, strengthening our NOP network and targeting expansion into selected international markets. Second, building a stronger foundation through enhanced systems, processes, talent and organizational capabilities to improve efficiency, scalability and execution. And third, enhance our infrastructure and strategic optionality, including our new global headquarters, manufacturing and product development upgrades and selected strategic opportunities that can further strengthen our platform. Overall, our first quarter performance reflects continued execution, disciplined investment and progress across several strategic initiatives. Several strategic initiatives that aim to expand our TAM and materially strengthen TransMedics' long-term position. We are moving with conviction and investing strategically in capabilities required to support future growth, improve scalability and drive long-term value creation. And with that, I'll turn the call over to Waleed for closing remarks. Waleed Hassanein: Thank you, Gerardo. Overall, we're proud of our success to date, but we're not stopping here. 2026 represents another critical period for TransMedics as we invest to deliver on several transformational growth catalysts. The strong financial position we've built over recent years have enabled us to pursue this multipronged approach, and we are more excited than ever for what lies ahead. In conclusion, we're humbled and proud of the significant life-saving impact of our OCS technology, NOP services and dedicated team and remain committed to our mission of expanding cases and improving clinical outcomes to patients in need for organ transplant worldwide. With that, I will now turn the call to the operator for Q&A. Operator? Operator: [Operator Instructions] Your first question comes from the line of Bill Plovanic of Canaccord Genuity. William Plovanic: I'm going to focus on CHOPS, if I could. And just could you please help us understand the strategy behind CHOPS, the thought on cannibalizing your existing uses? And then are you still planning on hitting that 10,000 organ target? Does that include CHOPS? Or is that incremental? And then also just any thoughts on CHOPS for liver and kidney? Waleed Hassanein: Thank you, Bill. I want to clarify one thing right off the gate. CHOPS is not cannibalizing anything. CHOPS is tackling a segment of the market, specifically DBD hearts that are like 2 hours of preservation that we're not being used at today. So that CHOPS is not cannibalizing. It's additive to our market share, and it's specifically focused on these short transport runs that are currently going on static cold storage. So that's number one. Number two, the strategy behind it was to find a better way to develop the control arm with better technique than the standard Styrofoam boxes that are currently being sold for static cold storage, but also presented an opportunity for us to provide a broader product portfolio to meet those centers that are -- their volume is primarily shorter distance and they don't invest in DCD or longer distance organ procurement. Finally, our goal right now is on heart and lungs in that order. We do not see -- obviously, it will be approved for organ preservation, cold static storage for organ preservation, but we have not made a decision yet, is it going to be rolled out for liver and kidney as well. We think the kidney cold static preservation is really a disaster, and we are trying to transform all this to machine perfusion. CHOPS is specifically designed for the cardiothoracic platform. Operator: Your next question comes from the line of Joshua Jennings of TD Cowen. Joshua Jennings: Hoping to just build on discussion on ISHLT will lead and just with the ENHANCE Part A and Part B programs, optimal scenario being kind of a win-win-win potentially driving day-only surgeries for high-risk DCD Hearts showing superiority in DBD short transports and then also opening up this advanced cold storage CHOPS opportunity. And maybe just help me better understand the dynamics there, if you would, and how ENHANCE Part A, Part B can help drive stronger liver heart penetration, OCS heart penetration. Waleed Hassanein: Thank you, Josh. As we've stated before, ENHANCE was designed exactly to accomplish the goals you outlined. We wanted to give the market a safe, reproducible and effective way to do morning hour heart transplants. We wanted to give the market a better way to preserve DCD Hearts and better way to preserve long distance and long preservation time, extended criteria hearts, minimizing edema and resulting in better function and enhancing function on OCS. That was primarily the design of ENHANCE. In addition, we wanted to penetrate that segment of the market that I called earlier, DBD Hearts that are, call it, sub-4 hours of preservation, which currently the vast majority of those are being transported using Styrofoam boxes with cold packs. That's Part B of ENHANCE. So yes, the vision, the strategy of ENHANCE is still intact. Unfortunately, the competitive dynamic caused a little bit of a confusion and resulted in a little bit of a delay to launching these 2 parts, specifically Part B. And we found a solution for it and that completely make ENHANCE fully independent from any competitive dynamic. So we are as excited as always and as we've ever been on ENHANCE, and we just can't wait to get the IDE supplement approved and getting the program rolling. So again, from where we sit here, we see this as a huge opportunity for us to catalyze adoption in heart across all market segments in heart and still have an optionality for centers that are not for whatever reason, are not focused on any of the sort of expanding portion of the heart market of DCD or long-distance procurement and just are happy with the cold storage to offer a product that is, we believe, will be -- will provide them -- meet their expectation and provide them potentially better solution, but on our platform, which is CHOPS. So as you said, Josh, we look at this as a win-win-win from TransMedics perspective. We just have to be patient. We have to execute on the strategy. We have to finish the program. From where we sit, Part A is going slightly ahead of schedule. We're excited about what we're seeing. The market is giving us early feedback on how the hearts are behaving -- coming off OCS, which is exactly as we predicted it would be. But again, we need to finish the program, and then we expect good things. Operator: Your next question comes from Allen Gong of JPMorgan. K. Gong: I had a quick one on what you're seeing in the market. I know intra-quarter, you had talked to some disruption that you were seeing at OPOs, especially as they're grappling with some of the potential changes proposed in the OPTN modernization. But I'm curious to hear what you're seeing so far in the second quarter. Are you seeing the same level of challenges? Are you seeing it get better? Are you seeing it worsen? And how should we think about your growth in the second quarter in light of that? Waleed Hassanein: Thank you, Allen. The specific things that we're seeing is what everybody is seeing, which is that the overall disease donor numbers have been below expectation and below last year. And we saw that throughout the first quarter and April continued. We hope that will reverse. We usually don't pay too much attention to inter-quarter variability, but we are paying attention this year because of the dynamic with the Modernization Act. And if you remember, we predicted that we will see some volatility in diseased donor numbers, which is the mechanism that OPOs kind of register their this pleasure with the transformation. And we've seen it reverse, and we have all the confidence that it will reverse. When it will reverse, we don't know, but we're not -- we don't expect this to be a chronic thing. And we expect actually when it reverses, it will bounce -- not just bounce back to baseline, but we expect some acceleration. That's what we've seen over the history over the last 20 years. When this happens, that dynamic kind of plays out as I outlined. K. Gong: Got it. And sorry if I missed this in the prepared remarks when bouncing around. I understand that the new strategy that you are approaching for your clinical trials. Do you have an expectation for when you think you can get those IDE approvals and then how quickly you can get those trials started afterwards? Waleed Hassanein: Yes. Thank you, Allen. As I stated in the prepared remarks that we plan to file the IDE supplement within the next couple of weeks, and we hope to be in approval stage and implementation stage by early Q3. Operator: Your next question comes from the line of Ryan Daniels of William Blair. Matthew Mardula: This is Matthew Mardula on for Ryan. And I might have missed this, so I apologize, but what is the guidance for operating margins this year? And is just the operating margin growth more weighted in the second half and investments more front loaded given what we've seen in Q1? Any more color into margins and its trajectory for the second half would be greatly appreciated. Gerardo Hernandez: Yes. What I mentioned in the last call is that we're expecting up to around 250 basis points below -- operating margin below last year, which now will be really adjusted operating margin below the number that we had in 2025. I would not like to go into more details in terms of phasing because we have an investment plan that it needs to materialize for it to result in what we are seeing. So I'd rather not go into those level of details now. Operator: Your next question comes from the line of Chris Pasquale of Nephron Research. Christopher Pasquale: Waleed, I also wanted to ask about the ENHANCE, DENOVO trials. And the CHOPS program seems like a great addition to the portfolio. But previously, you were comparing OCS to established hypothermic organ storage approaches in those studies. Now by including CHOPS in the trials, you effectively have 2 investigational arms being compared against each other. So I guess kind of a 2-part question is, one, does that complicate the interpretation of the results? Do you worry at all about not having a clean outcome here in terms of physicians being able to interpret what the data says. And then two, you're theoretically introducing a harder control arm here if you really believe that you're going to do a better job controlling the temperature of those organs. And so does that make you at all concerned about the margin of improvement you're going to be able to show in the studies? Waleed Hassanein: Chris, excellent question, and thank you for asking it. So let me address it in several sections. The first segment is there's no such thing as well-established cold storage other than ice. What we've seen over the years is there's these hypotheses and claims that are being thrown out there in the marketplace by a handful of newcomers to the space that haven't been really substantiated. In fact, even the variation in temperature we've seen at the last ISHLT that did not show any significant difference than 4 degrees to 8 degrees versus 10 degrees. -- none of these hypotheses have really materialized. So for us, we don't -- we're not concerned at all that we are lowering the standard. The opposite is true. We're actually elevating the game and saying, listen, if you, as a center, wants your organ to be stored between 4 and 8, we have a device that we can validate that it's between 4 and 8. If you want it at 10, we have a device that validates it at 10. So that's number one. Number two, we've discussed the second part, which is comparing to investigational arm. The CHOPS will not be investigational by the time we interpret the trial results. That's the plan that we discussed with FDA, and I would leave it at that. Three, do -- am I worried about raising the bar in the control arm? No. I think the OCS will prove its value because, again, these programs are designed to show several value points. And again, we know that even if we deliver superiority results, there will be a segment of the market that's still focused on cold static storage just because of cost, just because of limited volume or what have you. And in this case, TransMedics would gain market share in that segment that today, we don't have a product to sell to these needs. So net-net, we are extremely focused on getting these programs executed. We are -- we believe we found the best solution out. In fact, I would -- at risk of quoting the FDA, the FDA called it a creative and elegant solution. So we will go and execute the trials, and we are confident that our strategy is going to pan out on many fronts. We just can't wait to get these programs fully activated and we get out of this confusion that was created by the panic that was thrown into the mix by our competitors. Operator: Your next question comes from the line of Suraj Kalia of Oppenheimer. Suraj Kalia: Waleed, can you hear me all right? Waleed Hassanein: Can hear you perfect, Suraj. Suraj Kalia: So Waleed, I wanted to follow up on Chris' question just with a slightly different flavor. So one of the pushbacks we got after the CHOPS announcement was, hey, how do you know this -- the CHOPS is optimally designed, i.e., it isn't really designed as an inferior product. I'd love for you to push back on that notion. This is a new product. How do you know this is optimally designed as is? Hence, you can -- I think, so Chris was looking at one side of the spectrum in terms of good outcomes of the control arm. What I'm saying is at least what the pushback we got was, what -- if it is suboptimally designed and you get bad outcomes in the control arm, hence, you automatically look good. I'd love for you to push back on that notion of thought. Waleed Hassanein: Great. Suraj, thank you for asking this important question. The opposite is true, Suraj. The thing is, again, this question implies that the market is actually working with highly scientific, highly validated technologies. The opposite is true. There are transplant -- major transplant programs are going to Home Depot and buying either YETI coolers or RYOBI coolers and they're operating with them day in and day out. And guess what, none of these coolers have been validated or designed or even FDA approved for that intended purposes. We are elevating the game. We are a company that pride itself of developing and delivering Level 1 evidence to the highest clinical standards and to the FDA standards. That's number one. Number two, as I said in my prepared remarks, and I will reiterate it again here, CHOPS is designed to be a fully registered and regulated FDA medical technology, which means, by definition, Suraj, as you know, that we have to go through an exorbitant amount and exhaustive testing to validate that the design meets the intended purpose. None of the technologies I'm talking about have been -- have gone through that. So that's a hyperbole assumption. We -- the opposite is true. We are actually -- I am with -- Chris' spectrum is the one that's more realistic that we are elevating the game on the control arm. But even then, we are not concerned because we see significant value and also we provide solutions across the spectrum of values achieved -- that would be achieved in ENHANCE DENOVO. Operator: Your next question comes from the line of Matthew O'Brien of Piper Sandler. Samantha Munoz: This is Samantha on for Matt. Also wanted to talk about the clinical trials in CHOPS. I guess, first, kind of a 2-parter. Can you first just quantify and put into numbers for us how much of the market CHOPS is expected to address? And then I'm also trying to square the design of these trials. You mentioned the superiority. So these trials are essentially trying to say that OCS is a better technology versus now cold storage and CHOPS, but then also the decision to launch CHOPS, presumably this inferior technology. Waleed Hassanein: Sure. Sam, that's an excellent question. So let me address the latter piece first. Again, as I stated earlier, we all know you, everybody on this call and the listeners know and they've spoken to clinicians and surgeons in the field of organ transplantation. You ask 10 transplant surgeons, one question, you will get 12 different answers. So we know for a fact that, even when we prove superiority, there will be a handful of centers or a segment of the market that will still prefer cold storage technique in certain cases. Why not provide them that solution and go through the effort of providing a fully FDA-approved regulated device that gives them that flexibility. So that's number one. Number two, I'm sorry, Sam, can you repeat the first part of the question again? I lost my train of thought. Samantha Munoz: No, that's okay. Waleed Hassanein: Quantification. I'll give you one example. I'll give you one example. 2025 U.S. heart transplant total volume was 4,646 hearts, okay? You need to know that 46% of that total market which is 2,131 were DBD hearts preserved less than 4 hours. Our portion of that market is measured in single digits. So that is a market that is today all going to cold storage techniques. The Styrofoam cooler, the RYOBI cooler, the YETI coolers, why not provide an answer to that? Yes, we should gain a greater portion of that by demonstrating superiority or demonstrating better outcomes. But there will be a segment of that market still out there that the surgeon or the clinicians would need access to cold storage technique. Let's provide them the solution and provide them the clinical service of NOP and the logistics associated with it. Operator: Your next question comes from the line of Daniel Markowitz of Evercore. Daniel Markowitz: Thanks for taking my question. I wanted to talk about energy prices. It sounds like you're able to pass this along to customers via surcharges. Can you just talk through the dynamic a little bit? What's the exposure here? Are you able to pass it all along? And how does this flow through the P&L? And what's, I guess, contemplated in the guidance on that front, both on the revenue and on the COGS side? Waleed Hassanein: Daniel, thank you for asking this important question, which, as we understand, has been creating this black cloud overhang over TransMedics. People forgot who TransMedics is and which market segment we deal with. We're not United Airlines or Delta. We are an organ transplant company. So you need -- everybody needs to remember that we are operating in a highly competitive environment where there are other charter operators and companies that service the same market that we are servicing from a logistics standpoint. Historically, for the last 4 or 5 decades, transplantation have survived and grown when oil prices was high, when oil prices was low. How? Because the market has a mechanism to recover the cost of these -- when the prices go up. In fact, so because of that competitive dynamic, I cannot share with you on an open mic the detail of how TransMedics is doing it. All I can share with you is I can assure you and I assure all the listeners on this call that TransMedics is doing the absolutely right thing by our customers, and we are having the ability to control our logistics and our fleet and the network effect that was created here gives us maximum operating leverage on dealing with fuel prices. I'll give you one example. We are monitoring fuel prices by hub, and we have the maximum flexibility of moving hubs and floating our fleet to make sure that we are not incurring unnecessarily higher fuel charges, so we don't pass these unnecessarily high fuel charges to the transplant program. But again, the results speaks for themselves. If fuel charges are truly that unsurmountable challenge, we would not be able to print the results we printed here. And to put everybody's mind at ease, fuel charges is a small component of our operating flight hour cost. So it is covered and our network is the most cost-efficient way to deal with this problem until it's resolved. Operator: Your next question comes from the line of David Rescott of Baird. David Rescott: I want to follow up on some of the margin commentary, gross and operating. First on the gross margin side. I think historically, Q1 is typically or has been over the past 2 or 3 years, the high watermark for gross margin. So curious, one, if that is the way that we should be thinking about the cadence for the year, if there's any maybe transient impacts there? And then I appreciate some of the comments already on the operating margin side. But just trying to get a sense maybe for some of the puts and takes that you saw in Q1 versus what you're expecting to maybe normalize or work its way out as you get into the back half of the year. Maybe CHOPS is a piece of that. Just be curious on any more color on the gross and operating margin numbers in the quarter and then for the year. Right. Gerardo Hernandez: Right. Thank you, David, for the question. In terms of gross margin, we -- as I shared in the call, we're looking and we're expecting convinced that we can -- that the right margin for the business is the 60% -- around 60%. We are investing ahead of that. And because of that, we are seeing some pressure in the margin in the short term. I saw, let's say, significant positive impact -- operational impact in the quarter in Q1 that was mostly offset by some -- a good portion of that was transient expenses. So my view is that for the rest of the year, we should see a recovery towards our long-term goal. I'm not sure we're going to get all the way to the long-term goal this year or even next year. That's why it's long term. But I see -- and I believe that this is the quarter where it should be more the floor rather than the ceiling. Operator: Your next question comes from Young Li of Jefferies. Young Li: I think you mentioned the ENHANCE Part A trial is enrolling slightly ahead of schedule. I guess I'm wondering how does that sort of inform or change your expectations for Part B enrollment timing once that restarts in 3Q, is 12 to 18 months still the right time frame for ENHANCE Part B and DENOVO enrollment? Or can you enroll faster than that? Waleed Hassanein: Xuyang, thank you for the question. I'll answer the second part first. We still are holding the 12 to 18 months time frame. That hasn't changed. I think I caution to compare Part A to Part B. There are 2 different components. But it's -- remember, it's the same centers that will be enrolling in Part A or Part B. So again, it's all about value. If the center sees the value and sees the clinical outcomes in their hand, we expect the trial enrollment to pick up. For me, right now, I'm focusing on getting the IDE supplement approved, getting the TOPs into the control arm and removing all the confusion by competitors so we can get Part B enrolled. DENOVO is actively enrolling, and we enrolled a handful of patients already despite some of the confusion, thanks to the transplant program stepping up and moving forward. But I think it will accelerate even further once CHOPS is introduced as the control arm or an option for the control arm. Operator: Your next question comes from Mike Matson of Needham & Company. Michael Matson: So just on the CHOPS devices that are going to be used in the trials, will you be getting paid for those? And then just generally, can you talk about the kind of -- what kind of pricing we should expect on that, both in the trials and then when you're selling it just kind of the customers in the open market? Waleed Hassanein: Mike, I appreciate very much the question. Unfortunately, I cannot discuss the commercial structure of CHOPS yet, the priority is to get it through the IDE process. And all I can say is this is going to be a part of our NOP service offering, and I'll leave it at that. Operator: Your next question comes from Tom Stephan of Stifel. Thomas Stephan: Apologies if this has been asked, jumping between calls. But Gerardo, maybe for you, for the 20% to 25% guidance on revenue in the core business for '26, when I look at growth over the last, call it, year or so, 40% plus growth in 1H, 30% plus in 2H and then 1Q was a bit over 20%. So like with that trend in mind, what gives you confidence that the growth rate rest of year will remain stable in the core business or even accelerate a bit moving forward in order to kind of hit that full year 20% to 25%. Gerardo Hernandez: Thank you for the question. Well, basically, when we look at the phasing and the history of the transplant volume in the U.S., we can see how the remaining of the year, it continues to strengthen. So we're not expecting any change to the global volume, except for the one that Waleed mentioned before in terms of any potential disruption due to the Modernization Act. Now we believe that we can -- that we will deliver within the 20% to 25% growth with that. And I think that's really what makes us confident. We're seeing the results. We're seeing the adoption and that together with the last year's performance, it really shows how the market trend is going. So there is nothing really that would prevent us to get to that range, at least as I see it today. Waleed Hassanein: And Tom, let me add also, again, we don't comment on penetration and market share midyear or throughout the year. As you know, we comment on it at year-end because of the choppiness of it. But we're watching our market share in Q1 despite the overall transplant numbers and donor numbers being a little bit on the low end and below last year, we're maintaining and growing our market share, which tells me that we're taking some market share in Q1. That's what gives us the confidence that just organically, without even talking about ENHANCE and DENOVO that we should be able to meet that target range that we set for ourselves. Operator: There are no further questions at this time. I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer, for closing remarks. Waleed Hassanein: Thank you all very much for spending your afternoon with us. We're looking forward to one-on-one calls. I appreciate it. Have a great evening, everyone. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good morning, and welcome to Vivid Seats' First Quarter 2026 Earnings Conference Call. Following management's prepared remarks, we will open the call for Q&A. I would now like to turn the call over to Austin Arnett. Austin Arnett: Good morning, and welcome to Vivid Seats' First Quarter 2026 Earnings Call. I'm Austin Arnett, Vivid Seats' General Counsel. I'm joined today by Larry Fey, Chief Executive Officer; and Joe Thomas, Chief Financial Officer. By now, everyone should have access to our earnings press release, which was issued earlier this morning. The release as well as supplemental earnings slides are available on our Investor Relations website at investors.vividseats.com. Today's call will include forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our projections, including the risks discussed in our earnings release, our most recent annual report on Form 10-K and our subsequent filings with the SEC. Today's call will also include references to adjusted EBITDA, a non-GAAP financial measure that provides useful information to our investors. To the extent reasonably available, a reconciliation of adjusted EBITDA to its most directly comparable GAAP financial measure can be found in our earnings release and supplemental earnings slides. And now I'll turn the call over to Larry. Lawrence Fey: Good morning, everyone, and thank you for joining us today. We entered fiscal year 2026 with a clear focus and road map to enhance our market position and financial trajectory. With that focus, we delivered measurable progress in the first quarter, resulting in meaningful improvements across our business. Our first quarter results came in at the high end or above guidance. On a sequential basis, we delivered growth in GOV, adjusted EBITDA and our cash balance relative to Q4 2025. This momentum and sequential improvement support our confidence in returning to year-over-year growth in the second half of fiscal year 2026 and beyond. Our long-term strategy centers around Vivid Seats foundational strengths, leading technology and product innovation, operational excellence and a differentiated value proposition for our customers and partners. Pairing a seamless user experience with a differentiated value proposition is central to our mission. Vivid Seats strives to be the most rewarding ticketing company, and we are increasingly aligning our product, pricing and messaging around that core idea. We deliver value through competitive pricing, seamless user experiences and meaningful rewards that deepen customer loyalty over time. We are currently focusing our product innovation efforts on the core customer journey. We are improving funnel efficiency, enhancing conversion and delivering a faster, more intuitive experience. We recently deployed an upgraded app checkout experience, delivering a streamlined flow to accelerate the customer journey while improving conversion rates. We are encouraged by the early results and are excited about the pipeline of enhancements to both our app and web properties that will be deployed in Q2 and Q3. Our enhanced app value proposition continues to deliver encouraging results. In Q1 2026, Vivid Seats app GOV was up 20% year-over-year. This growth led to Vivid Seats app share of GOV exceeding 40% for the quarter. Increasing app adoption reflects the combined impact of the Vivid Seats Reward program, our lowest price guarantee and continued product improvements. Together, these investments represent a highly differentiated value proposition. App users are more engaged, return more frequently, convert at higher rates and touch paid performance marketing channels less often. As volume shifts into the app over time, we anticipate more efficient customer acquisition alongside enhanced customer retention and growing lifetime value. Alongside our app progress, we are continuing to invest in innovation across customer acquisition by working closely with leading AI platforms. This includes our recently launched ads on ChatGPT. While still in the early stages, we believe these efforts will help us capitalize on the long-term opportunities AI presents within the ticketing ecosystem. In tandem with the encouraging trends we are seeing with Vivid Seats branded properties, we were pleased to launch a significant new private label partner during Q1 with performance already exceeding our expectations. We also recently extended our agreement with a large existing private label customer, underscoring the value proposition we deliver to our private label partners. We are pleased to see the private label business deliver sequential revenue growth in Q1 2026 and believe this trend supports our expectation of a return to growth in the second half of the year. With that, I'll turn it over to Joe to walk through our first quarter financial results in more detail. Joseph Thomas: Thank you, Larry, and good morning, everyone. As Larry mentioned, our first quarter performance landed at or above the top end of our guidance, underscoring strong execution across the business. We achieved meaningful sequential increases in GOV and adjusted EBITDA compared to Q4 2025. This improvement is encouraging as we pursue a return to growth in fiscal year 2026 and beyond. Q1 2026 Marketplace GOV was $612 million compared to $581 million in Q4 2025, reflecting quarter-to-quarter growth of $31 million or 5.5%. This is particularly encouraging as the fourth quarter typically represents the highest GOV quarter each year due in part to robust sports volumes with all major leagues in the season. Q1 2026 consolidated revenue was $126 million, essentially flat with $127 million in Q4 2025. Within consolidated revenue, private label revenue grew 20% quarter-to-quarter, highlighting a meaningful growth trend in the channel despite continued year-over-year private label declines as we lap the 2025 loss of a large customer as previously disclosed. Marketplace take rate was 15.9% in Q1 2026 compared to 16.8% in Q4 2025. The lower take rate primarily reflects mix shift as private label revenue tends to come with lower take rates. We continue to expect near-term take rates to remain around 16% on a consolidated basis. Q1 2026 adjusted EBITDA was $9.5 million compared to $1 million in Q4 2025. Adjusted EBITDA grew $8.5 million, marking substantial improvement on a sequential basis and highlighting the benefit of a material reduction in operating costs relative to a growing GOV and revenue base. Cash increased over $40 million in the first quarter to $144 million. Cash flow benefited from improved profitability alongside seasonally strong working capital dynamics. Our first quarter results show significant progress across our operational and financial goals. Accordingly, we are reaffirming our 2026 outlook. For fiscal year 2026, we continue to expect marketplace GOV in the range of $2.2 billion to $2.6 billion and adjusted EBITDA in the range of $30 million to $40 million. This outlook reflects continued execution of our operating plan and financial profile. I will now turn the call back to Larry for closing remarks. Lawrence Fey: Our first quarter results indicate our strategy is working, and we are moving in the right direction. We are excited about our momentum in the Vivid Seats app, where improving conversion and increasing engagement are supporting double-digit GOV growth. We are also encouraged by the sequential trends in our private label business as we seek to return to year-over-year growth later in the year. As we move through the year, we are confident that our core strengths, leading technology and data, operational excellence and a differentiated customer value proposition will shine through. We are excited to continue executing against our strategy and to deliver long-term value to all stakeholders. With that, operator, please open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Cameron Mansson-Perrone with Morgan Stanley. Cameron Mansson-Perrone: Larry, last quarter, you highlighted that you're seeing some encouraging trends in terms of the competitive environment kind of rationalizing. Wondering if you're continuing to see that and whether there's any event category where you're seeing more or less industry competition for activity and whether competitive intensity from an event-specific angle is -- whether the rate of change is better or worse in any specific category? I appreciate it. Lawrence Fey: Yes. Thanks, Cameron. I think the moderation that we saw started in Q4 from StubHub on the paid search side has continued. That's been somewhat counterbalanced by continued aggressiveness in that channel by some other players. But no question, they've stepped back from their peak spend that we saw early middle of 2025. On the marketing spend side, I think perhaps a little surprising to us in the last few weeks, we've seen them shift to some price testing, price competitiveness. And so we continue to see, particularly in sports across the ecosystem, competitiveness across pricing, while the marketing landscape seems to have really stabilized and moderated a bit. Cameron Mansson-Perrone: Got it. Anything to follow-up on that, anything that you could add on. I think the benefits on the push to kind of drive activity in-app probably makes you a little bit more insulated in terms of the vagaries of competitive intensity in the industry. Any additional color on kind of how you think about that and what the opportunity could be as more activity shifts to in-app? Lawrence Fey: Yes. I think that's exactly right in terms of the goal and the strategy. We're happy to have exceeded 40%. I think implicitly though, at 40%, we still have exposure to the wins of paid search and marketing expense. But the objective is very much to control our own future, bring folks into the ecosystem once and then have it more about building a long-term relationship with those customers versus continually needing to go back into the pond and acquire folks. But we do benefit when things moderate, right, given the remaining piece of the business that's still out there. So we're pleased to see that. But the surface area of that exposure has shrunk quite a bit relative to what it was 2 years ago. Operator: Your next question comes from the line of Ryan Sigdahl with Craig-Hallum. Ryan Sigdahl: Larry, Joe, nice job on the sequential improvements and stabilization. I want to start on industry volume and curious what you guys saw in Q1 and then Q2 quarter-to-date, acknowledging I know April was a very tough comp, but just curious to try and compare your results relative to the industry and what you saw there. Lawrence Fey: Yes. In Q1, the data we're seeing was -- industry was probably up a smidge, so low single-digits, started pretty nice in January and then it moderated a bit into February and March. So net growth, but single-digits. And then Q2 thus far, I'd say, is roughly flat, got off to a slower start with Easter timing, but April picked up with a couple of meaningful concert on sales in the last 2 weeks. So we're back to roughly flattish. I think at the moment, generally continue to subscribe to what we had put forward at the outset of the year of modest industry growth. I think we've all seen the increase in some cancellations of certain tours over the last few weeks. I think most recent was The Pussycat Dolls, we also saw Zayn Malik, a couple of others Post Malone delayed, which I think on some level is reflecting either mispricing or some cap on potential for growth for the year. Ryan Sigdahl: Then just on market share, how that looked for you guys looking at SkyBox data on a sequential basis for the marketplace? And then secondly, on the market share, what you guys are seeing from SkyBox from your ERP customers? Lawrence Fey: Yes. So our share has been sequentially steady in our data when we look at Q4 into Q1 into Q2. As we've started to lap our most difficult comps last year, which started around now with the, call it, peak spending in the performance marketing channels, we've seen in our data, our share shift to being up year-over-year, not dramatically, but up, which is refreshing. And as you probably heard our theme throughout the call, I think we're well situated to return to growth in the back half of the year, and those are the types of metrics that you love to see flipping green in advance of that. Ryan Sigdahl: Great. Then maybe just on SkyBox too, if you're willing to comment specifically to the ERP customer market share? Lawrence Fey: Yes. There continues to be competition for those customers, but we have not seen any meaningful defections in recent months. So we're vigilant. We're continuing to reinvest and refocus on upgrading the platform to defend those relationships. But we've seen alongside our stabilizing and improving share in volumes, improvement in that dialogue and discourse with all of our sellers. So excited about the outlook on the SkyBox front. Operator: Your next question comes from the line of Ralph Schackart with William Blair. Ralph Schackart: Two, if I could. Just first on the macro environment and sort of the reads on the consumer now that we have some elevated oil prices. Larry had said that maybe there's some cap on prices. I'm not sure if those are related, but just any comments as it relates to that? And then I have a follow-up. Lawrence Fey: Yes. We -- there's nothing we could point to in terms of the kink in the curve where the Iran conflict started, oil prices moved and you can see a discernible shift in demand or purchasing in any clear way. As we touched on earlier, with some of the concert tours being canceled, perhaps that's a reflection of at least some subset of the market being tapped out. It also may just be part of the natural oscillation of some artists misprice the tours, which is, I think, the leaning at the moment. We have seen some weakness. The lower end of the Vegas market has probably been the most palpable place where we've seen the impact of potential consumer weakness. I think that's a comment I've really seen a number of the local operators reinforce, and we have continued to see that continue into the year. So in Vegas, we're really looking ahead to 2027 when supply tailwinds arrive with the reopening of the Mirage. But I think for this year, it's going to be more of a blocking and tackling type year in Vegas. Ralph Schackart: Okay. Great. And just maybe kind of switching gears to the app and some of the improvements you talked about in conversion rates. I think you said you're above 40% traffic now on the app. Maybe just kind of a sense how that's trended over the last year or so? And just any thoughts on where you think that you could take that rate over time? Lawrence Fey: Yes. We've seen really nice increases in the share of GOV coming through the app. And ultimately, the GOV function is how do you get more people into the app and how do you drive higher conversion. So our activities are centered on both of those. A lot of effort in the back half of last year on how do we make folks who see the app want to download and keep it through better messaging, the better value proposition, reinforcing the value proposition. The focus this year has shifted to the conversion side of things, how do you optimize the product experience? How do you collect more data to have better personalized information appear in front of folks, have a pretty exciting deployment calendar over Q2 and Q3 on the app side of things. So we're north of 40% in Q1. I think the ambition is for a majority of the business to come through the app. I think realistic timetable for that would be at some point in 2027 to achieve that on a run rate basis, but that's what we're aspiring to deliver. Operator: Your next question comes from the line of Brad Erickson with RBC Capital Markets. Bradley Erickson: So in terms of the return to growth, you pointed to, I think, the new private label partner giving you some added confidence there for the second half. Can you remind us any other items that could go -- kind of go right this year that gets you back to that growth in the second half of the year or at a high end of the guide type scenario? What would those drivers be? Lawrence Fey: Yes. I think as we frame why second half is where we draw the line for when we expect to flip back to growth. We lost the large private label customer in July of last year. So July and really August will be the first true clean month without that customer in there. Subsequent to losing that customer, as we noted, we brought a new meaningful private label customer on in Q1, which enabled sequential growth from Q4. I think within private label, the path to incremental upside is twofold. There's always the option of winning and bringing additional customers on. There's an interesting stick or 2 in the fire on that front. And then the other piece that we've redoubled efforts is how do we make sure our product and our support of our partners to maximize their organic performance is where it needs to be, and we're seeing encouraging progress on that front as well. With one of the big changes being any product enhancement that we are developing for the Vivid Seats marketplace, we want to make sure we make it configurable and available to our partners in short order. And some of the upgrades that get us excited on the Vivid side that they get pushed to our private label platform, I think provide an opportunity for organic outperformance in the second half of this year, but probably more prominent as you think about growth into 2027 and full year impact. Beyond that, I think the concert calendar and supply slate is largely baked at this point. So upside from here, I think, will largely be driven by fundamental performance, right? So can these new product releases that we have upcoming in Q2 and Q3 deliver the type of conversion uplift that we anticipate or event mix. And I think the World Cup is probably the elephant in the room. If you get some great matchups in the quarter finals, semifinals, finals and you have a series of Super Bowl size events, that would be a wonderful tailwind. We'll see. Bradley Erickson: Got it. And then just bigger picture, as you continue to have conversations presumably with the LLM companies, I don't know, have you seen any indications or just any updates you can give us on how you're thinking about their desire, ability, et cetera, to potentially grab economics of bringing the booking kind of closer to the 4 walls of the LLM. And then just generally, when you think about the risks related to that, remind us like what do you point to as kind of the specific points of insulation where the ticketing sector can maintain all of its economics within kind of an LLM booking environment? Lawrence Fey: Yes. I'd say on the AI journey broadly, we've actually seen to date, quite little progress on the top of the funnel disruption and quite a bit of progress on optimizing the way we operate the business on our side. So not to say it can't change, but everything we've seen to date has been more in the camp of the tools and capabilities allow us to be much more efficient and effective on a series of parameters to deliver a better customer experience, whether that's building the software more quickly, automating processes, better information sharing. It really has been a nice tailwind on the operational side, including specifically our customer service experience. If you look longer-term, nothing that we've seen indicates that the premise of like a fully captive transaction where the marketplace is boxed out is likely in the near-term or the focus of the LLMs in the near-term. I think the biggest barrier is this idea of when you have dynamic inventory in a deep vertical search category where you have a ton of individual preference. You need a lot of data. And they don't have -- the LLMs don't have that data across every subcategory that they service. So they're ultimately reliant on the folks like Vivid Seats or our competitors who have aggregated the inventory, have built the seat maps, have the dynamic real-time pricing. And so unless we compile all that information and provide to them, they won't have it. And then it's incumbent on us in the industry to make sure that we don't just give away the farm without being properly compensated. But that, I think, is at least what we're seeing today. That's a multiyear journey and not one we're seeing progress being made on the LLM front at the moment. Operator: Your next question comes from the line of Steven McDermott with Bank of America. Steven McDermott: I was wondering if we could shift a little bit to your partnership with United, kind of any updates there? And is that really driving any incrementality that you're seeing? And then I have a follow-up after. Lawrence Fey: Yes. United is a great example of one of the, call it, many partnerships and partners we have across the ecosystem. It's been a nice tailwind throughout the year. It's not an explicit needle mover of results. So it's been great to add them, excited to continue to grow the partnership and iterate on how to maximize it, but I would not consider that a primary influence on the results that you're seeing in Q1. Steven McDermott: Got you. And then as we look at your cost position after your recent reductions, do you feel as though you're kind of in a comfortable position to return to growth? And to that, can we expect a more aggressive OpEx spend in the second half of this year? Lawrence Fey: Yes. I think the cost side of the equation continues to be a bright spot. I think first and foremost, the cost reductions that we've actioned are flowing through. So they are real. Second, we have not seen any loss in productivity or capability. And in fact, I think I've actually seen our productivity and deployment rates increase alongside the efficiency gains, and that's one part optimizing and getting the right people in the right seats and one part utilizing some of these AI capabilities I was alluding to earlier. So as we sit here today, our objective is operating leverage. So as we grow, disproportionate amount of that growth flows through to the bottom line. And I think we have more opportunity to capture on the expense side as we move into next year. So there are some variable costs, right, as you complete transactions, even including in our G&A line, right, some software that's per dip and that type of thing. But I think our objective is even as we return to growth, our expenses remain steady on the G&A side. Operator: Your next question comes from the line of Thomas Forte with Maxim Group. Thomas Forte: Great. So first off, Larry and Joe, congrats on the quarter. Larry, sorry about the Illini and at least OKC is playing the Lakers in this round. My first question is more exciting. My second question is a little boring. On the more exciting front, what gives you confidence you can maintain your share and capitalize on World Cup this year? And if you're able to do that, how might World Cup contribute to your numbers this year? Lawrence Fey: Yes. I think World Cup has been a pretty meaningful tailwind. I think broadly consistent with what we've touched on in prior quarters where we framed the opportunity as something larger than an A-List concert tour, but perhaps less than Taylor Swift. What we've seen in terms of volume flowing through to date, the World Cup first went on sale in November. So we've been selling for 6, 7 months now with a couple of months to go as we approach the start of the games. It's tracking to those levels, right? So if a typical A-List tour is 1% of GOV for the year, Taylor Swift, more like high single-digits, it looks like overall, the event will be low to mid-single digits as a percentage of full year GOV. So we've had really nice performance and strength to date. These are high AOS events. And what we've generally found is that value proposition matters quite a bit when you're talking about these high AOS events. And so incumbent on us to continue to get the message out that our app is the place to purchase these high AOS tickets. And if we're able to continue doing that, I think we'll get our fair share a little bit better as we enter the playing phase of the tournament. Thomas Forte: Great. And then for my boring one, now that we're a quarter in, do you want to give your updated thoughts on cash conversion for adjusted EBITDA for '26? Lawrence Fey: Yes. I think largely consistent where if anything, our CapEx is maybe coming in a little bit lower than we had previously estimated. But directionally, net interest expense in the $20-ish million range, CapEx, cap software in the low to mid-teens and then a smidge of taxes relating to our international operations. So if you get to EBITDA in the $35 million to $40 million range, you'll be cash flow positive before considering working capital. And as we have outlined, we feel pretty good about our volume trajectory and that overall working capital will be a source of cash on balance over the course of the year. And so believe that we're tracking, assuming we continue to deliver against the numbers and guidance for a cash flow positive year. Operator: Your next question comes from the line of Kunal Madhukar with DB. Kunal Madhukar: A couple, if I could. One, on the app side, I wanted to understand how the app user demographics differs from the regular customers that you have on the website in terms of maybe age, in terms of their interest, in terms of engagement, in terms of geography, in terms of the type of tickets, concert versus sports that they are buying? And then I have a follow-up. Lawrence Fey: Yes. I think the biggest delineation between app and web users tends to be that the most frequent live event attendees, those who repeat most often are the ones intuitively, who would download an app for buying live event tickets. And that generally corresponds to the categories that have the highest recurrence, which would be sports, right? The highest recurrence example would be Major League Baseball, right? There's 81 home games. If you go to baseball game a year, there's a decent chance you'll consider going to 2 or 3. In contrast, Taylor Swift goes on tour once every 5 or 6 years. So the fact that you bought a Taylor Swift ticket might mean that you're interested in buying a Sabrina Carpenter ticket. But the fact that you bought a Cubs ticket means you're really likely to be interested in buying another Cubs ticket. So the biggest element that we see across the app is folks repeat more often, right? So if you buy on our app, the prospect for you buying again is higher. The second is that you over-index to sports because of the inherent recurrence within sports. Beyond that, there is not a lot to flag across our geography or demographics that I would say is of note. It's really more the frequency profile with a bit more sports orientation. Kunal Madhukar: Got it. And then when I was doing basic back of the envelope math, given app grew 20% and is now over 40% of the overall GOV, that suggests that the non-app GOV probably declined about 40%. And then you mentioned that we should expect that by 2027, app GOV on a run rate basis should be a majority of the business. So what kind of growth rate should we expect on the app side versus the non-app side for the remainder of the year? Lawrence Fey: Yes. First, definitionally, when we reference app GOV, that's of our Vivid Seats properties. So we're not speaking across the entire GOV footprint of the business, namely Vegas and Wavedash and our private label would not be part of that definition. So I would tweak the math a bit. I don't think we're in the business of forecasting or projecting by device type explicitly. But I think implicitly, we're expecting the business to grow, app to grow disproportionately. As we start lapping some of the most competitively intensive periods, I think we expect that we can get web back to growth. But whenever you're looking at these aggregate GOV numbers, you just have to fully decompose it, right? You have to pull private label out. We lose private label partner that is different than competitiveness in the web, competitive landscape lens us versus StubHub versus SeatGeek. So yes, it's an implicitly true statement that app was up and other parts of the business were down, but decomposing is pretty important. Operator: Your next question comes from the line of Andrew Marok with Raymond James. Andrew Marok: One, with this quarter's results coming in nicely and the reiteration of the guide, is the business just kind of becoming a bit more visible in your view? Are you able to maybe have a little bit more forecasting confidence than you have had in the past? And then I have a follow-up. Lawrence Fey: Yes. Thanks, Andrew. I think I would agree with the statement overall. Certainly, as we move through a year, right, as we get to Q4 where the concert on sale calendar solidifies and crystallizes it through the back half of Q4, first half of Q1, we sit here with a pretty good sense of what the supply side of the calendar will look like. I think the fact that we've really tightened up our expense base lowers the bar, if you will, which helps mute impact. And then the last piece is we've reduced the surface area and exposure to paid search. It's still present, but we've reduced it. I think that helps diminish volatility from things that are exogenous, namely competitive or competitor posture. So there will still be variance, right? Event mix is still a real thing, right? If we have great World Cup matchups or bad World Cup matchups, long series, short series, more concert cancellations, right? Those are all exogenous and can introduce volatility. Competitor behavior, competitor posture can still introduce some volatility. But in terms of the controllables, I think we've dialed them in quite a bit and feel better about putting outlooks in place. Andrew Marok: Appreciate that. And then maybe as it relates to the app business, I think you mentioned this a little bit in your prepared remarks, but I just kind of want to ask it directly. There's kind of this meme out there for older people, especially where big purchases are done on the desktop, right, like ticketing, hotel bookings, flights, et cetera. How do you sort of combat that to drive app growth? Is it purely demographic? Or are there kind of nudges that you can give your consumers to get them to buy on the app? Lawrence Fey: Yes. Thanks, Andrew. It's a great question because I guess this probably reveals where I sit on the age bucket. But I will do that as well, right? When you're in discovery mode, you want to be able to either consider a bunch of different events or a bunch of different seating areas. Sometimes I'll actually do some searching on the bigger screen. But I think the objective we have is to make sure folks know that there's a better value proposition available in the app. And so if you want to transact on desktop, that's great. And we're going to deliver the optimal experience for that. But if you also wanted to discover on desktop and then download the app, properly messaging that the lowest price guarantee and typically our lowest prices will be available in the app. Increasingly, we're going to have our rewards program prominently appear in the app and less so on web. So there will be material inducement to transact in the app, but we, of course, want to support people wherever their workflow wants them to transact. Operator: Your last question comes from the line of Maria Ripps with Canaccord. Maria Ripps: First, I just wanted to follow-up on your private label business. So you mentioned a new customer addition there, which is encouraging. But how should we think about that segment going forward beyond sort of returning to growth? Do you think sort of it can return to the run rate you had the business at about a year or 2 ago? Lawrence Fey: I think in absolute size, it's unlikely that we'll in the near-term, reclaim where we had been before the large customer loss. What I think we aspire to deliver is that the segment will grow at or above the broader marketplace and at or above industry rates. And so I think the 2 paths there would be enabling our existing customers to organically outpace the industry. And then what gets exciting is you have the option and the opportunity to add new customer wins on top of that organic growth. And so we're seeing all of those signs pointing in the right direction where we can have both happening in parallel, which could lead to some nice sequential growth and starting in Q3 set us up for delivering sustained year-over-year growth. But from an absolute standpoint, I don't think returning to the pre-customer loss levels that we saw in 2024 or early 2025 is a near-term target that we think we can deliver. Maria Ripps: Got it. That's helpful. And then just a quick follow-up. Can you maybe update us on your international strategy? And how important is it kind of on the list of your investment priorities at this point? Lawrence Fey: Yes. We continue to be encouraged by the international opportunity. I think we mentioned in our last call or 2 that we've achieved -- we're positive on the contribution margin standpoint in 2025. We grew GOV triple-digits in 2025. We've continued to see GOV grow into 2026. But in the spirit of focusing our efforts on the highest impact priorities, what we're focusing on are upgrades that benefit not only international, but also North America. And so as you think about things like our checkout, irregardless of your location or your geography, that will benefit the business. So the near-term road map is really focused on that type of improvement. And then as we get through these universal upgrades that will benefit international, but also benefit North America. We do have an interesting road map of international upgrades queued up. It's just a matter of if we can get to it in the next quarter or the next couple of quarters. Operator: Thank you. I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Greetings, and welcome to the Marriott Vacations Worldwide First Quarter 2026 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neal Goldner, Vice President, Investor Relations. Thank you. You may begin. Neal Goldner: Thank you, and welcome to the Marriott Vacations Worldwide First Quarter Earnings Conference Call. I am joined today by Matt Avril, our Chief Executive Officer; Mike Flaskey, our President and Chief Operating Officer; and Jason Marino, our Executive Vice President and Chief Financial Officer. I need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release as well as comments on this call are effective only when made and will not be updated as actual events unfold. Throughout the call, we will make references to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures in the schedules attached to our press release and on our website. With that, it's now my pleasure to turn the call over to Matt. Matthew Avril: Thank you, Neal, and good morning, everyone, and thank you for joining us. Each quarter, I will address our prior commitments, progress made and what lies ahead. Let me start this morning from where we left off on our February earnings call. During that call, we laid out a clear set of priorities and how we expected the year to unfold. Our focus was on improving profitability and cash flow, accelerating growth, taking actions to lower costs and monetizing non-core assets. We also stated that 2026 would be a first half, second half type year. Let me begin by updating you on where we stand against those commitments. We talked about aligning our organizational structure and leadership team, reduce the scale of our Asia business, which we've done, benefiting our current year capital spend and future margins, take actions to lower costs, monetize non-core assets and most significantly, initiate our commitment to revenue growth and operational excellence. In the last 2 months, we've made demonstrable progress. We've made significant changes across the executive team and in key leadership roles to better drive overall performance, grow revenues, EBITDA and cash flow. In particular, the process began with hiring Mike as President and Chief Operating Officer, and in turn, we've added experienced leaders across sales and marketing. We have also successfully added direct frontline talent in our sales galleries. The leadership decisions taken were deliberate and a priority set when I stepped in early in the year, and they are already beginning to show results in the business. I undertook a full assessment of where we needed to build on the best of our company and also the need to infuse it with new experience and talents from outside. These actions are about positioning the business for more consistent performance and stronger growth over time, now and ongoing, including the initiatives Mike will discuss shortly during the call. We also implemented the workforce reductions we committed to on our last call, and we completed those in the middle of March. They will benefit the balance of the year and are contemplated in our guidance. We closed on the sale of the Westin Cancun hotel in January and listed additional non-core assets targeting more than $125 million gross in additional proceeds this year. We remain on track to generate $200 million to $250 million from asset sales by the end of 2027. With that context, let me turn to the first quarter. Our first quarter was a period of significant transition. We stated in February that we expected contract sales and adjusted EBITDA to be down in the first quarter, and our results were consistent with that expectation. Adjusted EBITDA declined 16% to $161 million. Contract sales were down 2% versus last year with VPG increasing 1%. Tours were down 3%. Owner sales increased 3% compared to the prior year, driven by a 4% lift in VPG. Marketing and sales costs increased 300 basis points year-over-year as a percentage of contract sales, reflecting the in-flight operating strategies from late 2025. Product costs increased 110 basis points on the same basis and was in line with our expectations. Finally, we generated $114 million of adjusted free cash flow, resulting from our deliberate actions to improve our cash generation and capital discipline. Our focus remains unchanged, consistent execution, improving profitability, strong cash flow generation, disciplined capital allocation and a clear emphasis on near-term and sustainable growth in contract sales, EBITDA and cash flow. Our financing and management businesses continue to generate stable, recurring high-margin revenue and cash flow, underscoring the durability of our business model. Importantly, given the nature of our product, our owners have already purchased their future vacations. This provides a high level of visibility for our future tours that fuels our direct-to-consumer sales model and allows us to drive demand on site. Our forward-looking indicators remain healthy. Resort occupancy is expected to be 88% to 90% in Q2 and for the full-year. 96% of our expected owner utilization for the second quarter is already on the books. We expect owner occupancy to increase as our new initiatives we are implementing begin to drive higher owner arrivals. These compelling occupancy levels reflect our strong commitment to delivering outstanding hospitality services and overall memorable vacation experiences to our owners. Lastly, the nature of our preview packages provides a highly predictable source of future tours totaling approximately 110,000 for 2026 arrivals. We are confident in what is ahead. We have executed on capital discipline initiatives, taken steps on our cost and operating structure and more recently, implemented a series of hires in sales and marketing that are already driving results. During today's call, Mike and Jason will detail these initiatives and how they are reflected in our expectations and our April contract sales results. In accepting the appointment to CEO in February of this year, it was important that I identify clear priorities and actions to be taken with respect to them. Principal among those have been the ongoing evaluation of our operating structure and personnel that started day 1 when I stepped in last November. I very much believe the best companies are able to benefit from continuity and experience in their organization and at the same time, being able to attract talent with different experiences and additive expertise to the business. I have also been committed to driving improvements in our operating culture. Being able to act with speed and commitment and decisiveness is an imperative for our organization. We have dramatically improved the cadence of our decision-making. We have added talent. We are generating improved results as you will hear more of today. It was also clear that there would be a period of transition, and that was evident in our first quarter earnings. Looking forward, we are very pleased by the significant traction we are seeing in April, during which our contract sales were up 8% year-over-year. We are increasing our contract sales guidance based on our recent trends and the impact of new initiatives underway. As we work through the first half of the year, there are certain expenses being incurred as we transition to our new operating priorities, principally in sales and marketing. Accordingly, we believe it is prudent to reaffirm our existing EBITDA guidance. With respect to our future, I'm incredibly excited about what lies ahead for the company. Game-changing initiatives are underway. They are returning us to a path of revenue growth, product enhancement, energy and optimism that now exists inside our company. Momentum is an incredibly powerful force in either direction. I will say unequivocally, there is a tremendous positive momentum inside our company. People are energized and committed. It is being built both with the infusion of new talent as well as the reinvigoration of our many associates in the workforce at Marriott Vacations Worldwide. We have long had the opportunity to represent the best brands in vacation ownership and unbelievably loyal and broad-based customer profile. The company has long enjoyed a premier position in the industry, and we look forward to reasserting that position. With that context, I'll turn the call over to Mike. Michael Flaskey: Thanks, Matt, and good morning, everyone. I joined Marriott Vacations about 3 months ago. Since then, I have spent my time diving into the business, the team and the opportunity in front of us. I've been in the field with our associates and in many of our sales centers. I've also spent time speaking with investors. What's clear to me is that we have a strong team, tremendous brands with very meaningful upside. What's encouraged me most is how much of the opportunity ahead of us is within our control, and we have already implemented several initiatives that are driving improvement. At a high level, our new operating framework is centered on improving contract sales by growing the right tour flow and strengthening our operating discipline. Expanding demand from new sources and driving incremental tours from our existing infrastructure, all while increasing average sales price. As we look at the opportunities in front of us, we bifurcated them into both near term and long term. In the near term, we have a clear focus on improving our core operations, which are already impacting our results. First, we are building a high-performance organization designed to drive revenue growth by strengthening our sales processes and talent. To achieve that, we hired a new Chief Sales and Marketing Officer with a demonstrated track record of success that I've also worked with for years, and we have several other powerful sales and marketing leaders that we have added to the team. We are also seeing a resurgence of top sales talent returning to the organization alongside exceptional new talent desiring to join us. Our transformation has the company excited, and we are seeing it across the organization. Second, we reorganized our sales and our field marketing organization, positioning us to move faster and more effectively as we execute our growth initiatives. On May 1, we restructured our sales and marketing leadership compensation packages, aligning their incentives to revenue growth and net operating income, which better aligns their compensation with the company's revenue and adjusted EBITDA performance. Third, we launched a new data-driven tour logistics initiative designed to better align tour flow with the right salesperson, improve conversion and enhance the overall selling experience through more effective use of sales center technology. We are already seeing results from this initiative. I am very happy to report that global contract sales were up 8% in April on a year-over-year basis, as Matt mentioned, powered by North America, where we were up 11%. This is very encouraging on many levels, in particular, North America, which is offsetting our planned reductions in Asia. This is a significant indicator that our strategy has taken hold. We also have several initiatives that will enable long-term sustainable growth that will meaningfully impact EBITDA in the second half of the year. For example, on May 1, we announced changes to our owner loyalty levels, adding 2 new tiers at the high end of the Marriott program. By the end of May, we will also be introducing a new buyer incentive called Dream Vacation Packages. Through these initiatives, we expect to drive a higher close rate and more predictable and quantifiable pipeline of future tours and higher VPGs company-wide. On June 22, we plan to launch our experiential event marketing program to be called Inner Circle. In my experience, this type of event platform has proven to drive higher quality incremental tour flow and VPG, while strengthening engagement across the owner's life cycle and the team that we now have introduced this concept to our industry. We feel very confident in our ability to execute on it. Importantly, Inner Circle supports our broader lifetime value strategy by enhancing the customer journey, extending owner longevity and creating opportunities for increased wallet share over time. Let me pause on this for just a moment and explain what this means. The totality of these 3 programs incentivizes our owners to return to our properties and our sales galleries in a more predictable and managed way, driving higher tours and VPGs through increased average transaction size, thereby driving higher and more profitable contract sales. Finally, we are building a national and local partnership marketing capability to expand our reach beyond our existing databases to drive incremental tour flow. This will also allow us to grow tours through affiliations with the proven Marriott Bonvoy and World of Hyatt loyalty programs. Some of these initiatives are more transformational and will take time to ramp up with meaningful benefits expected to begin later this year and into 2027. Through the launch of these new initiatives, we are focused on growing our average transaction size and VPGs. We also have a unique opportunity with our points product to create multi-week vacation packages supported by our transformed owner benefit levels and powered by our world-class brands. To support these initiatives, we are applying data-driven tour logistics to better match the right guests with the right sales executive and upgrading our programs to create more compelling reasons for owner engagement while on vacation. Particularly through initiatives like the Dream Vacation Packages and Inner Circle. To wrap up, to say I'm very encouraged by what I've seen so far is an understatement. We have a clear pathway to significantly improve our commercial performance in both the near term and the long term. The power of the talent that we've added to the company and the reenergized disposition of the existing team has improved operational execution across the board. Along with our new owner loyalty levels, the Dream Vacation incentive and our Inner Circle event platform, they have us set up nicely for a predictable and sustained growth trajectory. With that, I'll turn it over to Jason to walk through the financials and provide more detail on the quarter. Jason Marino: Thank you, Mike. This morning, I'll walk through our first quarter results, then touch on the balance sheet, cash flow and our outlook for the year. First quarter contract sales declined 2% year-over-year to $411 million. Owner sales increased 3%, offset by lower sales to first-time buyers. Tours declined by 3%, driven primarily by our planned actions in Asia, which was restructured at the end of January to improve profitability and cash flow as well as our decision to reduce tours to consumers with FICO scores below 640 starting last year. Excluding Asia Pacific, contract sales declined 1%. Development profit declined $24 million year-over-year to $55 million due to lower contract sales, lower reportability and higher product costs, all of which were in line with our expectations. In addition, marketing and sales costs increased year-over-year, primarily due to increased training costs and higher salaries, which are being addressed with the initiatives Mike mentioned. Sales reserve was 12.3% of contract sales in the quarter, lower than Q4. 120-day delinquencies were up 17 basis points compared to the prior year and were down 45 basis points compared to 2024 levels. Defaults were unchanged from prior year, and our rigorous reserve process continues to indicate that we are adequately reserved given our overall loan performance. Importantly, our more recent 2025 receivable originations are performing in line with our expectations, giving us further confidence in our reserve. As expected, rental profit declined $10 million year-over-year due to higher inventory levels and associated unsold maintenance fees. Management and exchange profit declined $2 million, largely attributable to lower profit at Aqua-Aston. Finally, excluding the change in the presentation of interest expense in our warehouse credit facility, financing profit increased $2 million. As a result, adjusted EBITDA declined 16% year-over-year to $161 million and adjusted EBITDA margin declined 370 basis points to 19%. Turning to the balance sheet. We finished the quarter with $3.3 billion of net corporate debt and leverage of approximately 4.2x. From a maturity perspective, we are well positioned with no corporate debt maturities until December 2027, providing us with meaningful financial flexibility. Our adjusted free cash flow was $114 million in the quarter, an increase of $74 million over last year, driven by lower inventory and capital spending as well as the $50 million of proceeds we received from the sale of the Westin Cancun. In April, in the midst of market volatility and increasing uncertainty, we completed our first securitization of the year, raising $460 million at a blended interest rate of 4.86% and an advance rate of 98%, further strengthening our liquidity and demonstrating continued access to the ABS market. Before turning to guidance, I want to briefly address capital allocation. We remain focused on reducing leverage over time while continuing to return capital to shareholders. As cash flow from operations and disposition proceeds materialize, we will balance debt reduction, dividends and opportunistic share repurchases within a framework to reach leverage levels below 4x. Turning to guidance. We now expect contract sales to increase 3% to 7%, which is above our original guidance, driven by the new revenue initiatives Mike discussed. We expect tours to decline in the 1% to 3% range this year, driven by the intentional reduction in Asia and for VPG to increase in the mid- to high single digits. As we highlighted in our press release this morning, we are reaffirming our EBITDA guidance for the year, reflecting our higher contract sales and higher operating expenses over the short term to support these new initiatives. We expect our operating expenses as a percent of revenue to decline sequentially over the balance of the year as we leverage growth in our revenues. In terms of quarterly cadence, contract sales and adjusted EBITDA growth remains weighted toward the second half of the year as new revenue initiatives ramp with our first Inner Circle events targeted for later this quarter. For the second quarter, we expect contract sales to be up 4% to 8% year-over-year as our new revenue initiatives start to work through the system and adjusted EBITDA to be $197 million to $202 million. Finally, our expectations for management and exchange profit, rental profit and G&A are largely unchanged from our previous guidance. From a cash flow perspective, we continue to expect adjusted free cash flow for the full-year to be between $375 million and $425 million compared to $145 million last year, and we expect free cash flow conversion this year to be in the mid-50% range. We continue to make good progress on our non-core asset dispositions, listing multiple assets that we expect to generate more than $125 million of proceeds this year on our way to disposing $200 million to $250 million in total by the end of 2027. Any proceeds from these sales will be excluded from our adjusted free cash flow. As I wrap up our prepared remarks, I couldn't be more optimistic about MVW's long-term future. The organization is energized by our new leadership team, our April sales results, the launch of new programs and culture of accountability. The transition to EBITDA and profitability growth is beginning. Our momentum is increasing, and we look forward to the second half. With that, we will be happy to answer your questions. Operator? Operator: [Operator Instructions]. Our first question comes from David Katz with Jefferies. David Katz: I feel like, quite frankly, I have about 10 questions. What I'd like to just get from the team is really just a big picture perspective on how confident are you versus where you were a few months ago when we first started talking about this in the long-term earnings power? I think that's been made clear by the incentives that you've laid out, not just near term, but longer term. What has to go right for you to achieve that long-term big picture earnings power? Matthew Avril: David, it's Matt. Thanks for the question and for joining us. I think the simple direct answer is we have to continue to enhance the experiential value proposition to our owners, drive their engagement rooted in our guidance for the rest of the year and things we're already seeing is lifting our tour flow opportunities with our owners at our properties. We have tremendous occupancy levels, and there is a lot of runway for us to do that. Secondly, as I said at the beginning of my remarks today, in any situation from my perspective, like the one when I stepped in, is you assess who and then you go assess what. I will tell you that we are, from my personal perspective, well ahead of where I could have hoped we would be a little over 2 months ago, stepping in and taking on the role in a more permanent way. We needed to have an infusion of talent, expertise and blending that into a terrific in-place workforce in order to accelerate how we put things into play in the field in our business. As we've alluded to, to see that take place in the way that it already has in April has been really gratifying and probably faster than I could have expected during that period of time. Then in terms of how you sustain that over time, there is sort of that inherent flywheel, which is as we build and create more value experientially in particular, for our owners, give them more reason for us to have more share of wallet for their travel and their vacation. It's the nature of the product that our best customers do travel and travel more, and we're committed to earning more of that share of wallet. Then over time, we'll continue to add new owners to the top of the funnel as well. The team has been assembled and is being assembled each and every day. We've been in very good shape on the team, the initiatives to add attractiveness to owning the product and experiencing it. That's the big picture that I would provide. David Katz: Appreciate it. One just a very quick follow-up. Since the Street is hyper-focused on this, and it's -- we always need something to worry about. Is there anything noteworthy with respect to loan loss or delinquencies and it may be difficult to tell at this stage in the turnaround, but just checking in. Jason Marino: Yes, David, this is Jason. Thanks for the question. Yes, at this point, we feel really good about where the portfolio is. We ran through a bunch of metrics on the call in our prepared remarks, and we feel really good with our process and what we're seeing, especially as it relates to the near-term delinquencies, which are the majority of the book in terms of the nearer-term vintages, sorry, and so we feel good. Operator: The next question comes from Patrick Scholes with Truist Securities. Charles Scholes: Question for you regarding expectations for development profit. I believe on the prior earnings call, you had expected development profit for the year to be up. It was down quite a bit in Q1. Is your -- in light of that, do you still expect it to be up for the full-year? Jason Marino: Yes, Patrick, this is Jason. That's right. As we move through the year, we expect our development profit will grow as we -- based on the implied guidance that we've given, that is the big growth driver in our business. That's what Mike is driving throughout with the higher contract sales. We expect product costs similar to the guidance we gave on the last call, we'll be up a bit year-over-year, but consistent with where we were in Q1. Then as we go through the year, we'll continue to leverage our marketing and sales costs and drive higher development profit as we move through the year, so that is our expectation. Operator: The next question comes from Ben Chaiken with Mizuho. Benjamin Chaiken: I would love to hear about some of the changes in sales and marketing, specifically on the event side. I think, Mike, you kind of suggested it actually doesn't start -- doesn't launch until later this summer. Is that correct? Then anything you can share here would be helpful. Then is it fair to say that the contract sales acceleration you've seen has not even kind of like touched that event/Inner Circle side? I guess the implication being that it's all related to changes in sales personnel. I guess I'm kind of alluding to the success in April. Then one follow-up. Michael Flaskey: Yes. Thanks, Ben. Look, from April standpoint, if you think about it, we need to be great at what we're supposed to be great at. What you saw and what Matt alluded to and I alluded to in the prepared remarks about our contract sales growth in April was from doing just that, fundamentally going in and being better at operating the business. To use an analogy like a sports team, we had to eliminate the penalties. We had to get in shape to play the fourth quarter. We had to do the basic fundamentals to win a few more games, which is what you saw. Now as we start introducing the things that we talked about like the new loyalty levels May 1, the Dream Vacation incentives towards the end of the month and then specifically your question, Inner Circle coming in June, we should really see that just turbocharge the momentum that we've already built. As you know and as you've written about, we're -- we know the event business, and we know it very well. The team that's here created the event business for the entire industry. We've never had brands like this to power it, so it's incredibly exciting, not only to our first customer, which is our sales and marketing executives, but it's also going to be a big hit with the owners. Benjamin Chaiken: Then I guess on the contract sales guidance, this is maybe a multiparter, but I guess, a, how much did you -- and I guess we can all -- we have some implication or some inference could you give us April, but how much did you bake in for these for Inner Circle specifically in broad strokes without getting like too hyper specific? Then question 2 would be, how did you think about the change in contract sales guide and no change in EBITDA? Could you maybe just help us out a little bit on that? Was there something on the cost side that you're assuming that's different than prior? Or is it just some conservatism? I know in the prepared remarks, you mentioned some sales -- some higher sales and marketing expense. If we could just open that up a little bit, I think it would be very helpful. Matthew Avril: Ben, this is Matt. Thanks again for the questions. I'll sort of do it in reverse order. From a guidance perspective, you're right in my prepared comments, I talked about sort of the word prudent. We clearly have terrific momentum, and we've got great traction raising the guidance level. I acknowledge both some of the transition costs that we're already absorbing relative to the first quarter's performance, some transition costs as we have brought on the new teams and launching the events platform, the Dream Vacations and the owner benefit levels. There's a lot of internal work that has gotten done at an accelerated rate to support those rollouts. I think our guidance being in the range simply reflects that dynamic to the degree it ultimately may turn out to be conservative. I'll tell you, we're very focused on delivering actual. The decision on guidance was simply balancing the -- what we would acknowledge is the more recent trend, but the enthusiasm and optimism and the visibility we have to what's coming on the revenue side, and we're going to work really hard on the cost side to maximize that flow-through. It was a bit of balancing those 2 competing forces, if you will. Your other question, Ben, on the front end, please remind me. Benjamin Chaiken: Yes. It was basically just how did you think about -- obviously, there's been some acceleration in contract sales from the start of the year. Then how did you balance that versus layering in the Inner Circle dynamic? I don't know to the extent how much that actually contributes to '26. Maybe it's maybe the back half. Matthew Avril: Yes, fair question, Ben. We feel like we've got a number of factors and certainly events is platform and the attractiveness of that is part of it. They all combine to drive one of our underlying metrics that are contributing to that contract sales acceleration is our increased tour flow from our owners on property and increasing the experiential aspect, those events are geared towards our best customers and our owners on site. It is embedded in that acceleration. I wouldn't do an attribution waterfall chart, if you will, this much of the increase is this, this, this. It is the totality of all of the things that we're rolling out simultaneously. Operator: The next question comes from Brandt Montour with Barclays. Brandt Montour: I apologize for my connection here. Can you just maybe break out that April metric and give us a sense of how much of that was close rate, how much of that was expanding purchase price, if there's mix benefit in terms of repeat versus new owner? Just trying to get a sense for how much of that is blocking and tackling and how much of that is mix? Michael Flaskey: Brandon, it's Mike here. Our VPGs in April were up $450, just over $450 or about 12.7% versus prior year. Our tour flow was exactly as planned with our reduction in Asia. North America tour flow was right on par. Asia was down as planned. That's kind of the mix and average transaction size is a key focus point for us going forward. In the month of April, it was actually a balance of close and average transaction size. Brandt Montour: Then maybe another one for you, Mike. You spoke about getting the right tours Take us back a little bit, when you got there, what kind of tours were you guys getting before? What kind of tours are you getting now? Why do you think it's going to be low-hanging fruit that you can use your assets to hone in on those higher hit rate tours? Michael Flaskey: Right. Well, it's a combination of things. First, by far, in my career, this is the most robust data pool that we've had to generate leads with the Marriott Bonvoy and the World of Hyatt, and we have significant runway left for first-time buyers in those databases. Let's start there. What I observed when I got here was that this company significantly underperformed versus the industry on owner arrival to tour rates, and so we have a serious opportunity to enhance that and the flow-through on those for every 1 percentage point is significant. We're very, very excited about that and that comment about the right tours was tied to that. Subsequently, when I talk about tour logistics, one of the things that we have worked diligently on in the past and that we're implementing here is kind of our proprietary model where we make sure we understand the VPG by guest type of every tour that's coming into our sales galleries and then also knowing our individual sales executives VPGs by guest type and then using logistics to match that up so that we give ourselves the highest propensity for close. That is something that really was just starting to take hold in the month of April and has significant runway for the business. Operator: The next question comes from Lizzie Dove with Goldman Sachs. Elizabeth Dove: I just wanted to see if you could expand on the new owner side of things, what you're seeing there in terms of new owner VPG versus existing and what you're kind of baking in for contract sales in terms of any mix shift in terms of new owners for the rest of the year? Michael Flaskey: I'll take the first part, Lizzie, it's Mike, and then I'll let Jason talk about the guidance. As a volume, we were at 28% in the first quarter of first-time buyers as our mix. On a contract basis, it would be higher than that. We believe that we have significant opportunity within the business to increase first-time buyer tour flow and first-time buyer sales. We're going to be very prudent about how we do that. As I just mentioned in answering Brandt's question, we have significant runway in front of us on our owner arrival to tour. It's really going to be a yield management exercise of being smart about how we grow our tour flow and balancing it as we go forward. Jason? Jason Marino: Yes, Lizzie, we ran, as Mike said, about 70% existing owner sales in Q1. We've been in that range for a bit, and so I think that's a good range, plus or minus for the rest of the year, depending on some of the things that Mike talked about with trying to drive that owner VPG and the owner capture and driving contract sales. Over the long term, we do expect to grow our first-time buyer tours, and that's something for the long term, but this year, I think that 70-30 mix is probably where we'll wind up. Elizabeth Dove: Then I just wanted to touch on Hawaii. I know there's been some inclement weather there over the last couple of months, and I think you have a reasonable amount of exposure there. Anything that you're seeing there or that we should be noting going forward on that? Matthew Avril: Lizzie, this is Matt. Thanks for the question. Certainly, the adverse weather there in the last 3.5 weeks of March was disruptive. We do have a significant presence on Maui. Candidly, just from a call perspective and how we talk about things internally, the benefit of our business model is our direct marketing and being able to bring people in. We're going to not lean on weather or disruptions or other things like that. When we talk about our results, we certainly prefer better weather. Hawaii is a tremendously important market to us, and we think there is for the reasons that Mike has outlined in our system overall are very applicable to Hawaii. We're excited about what's ahead of us in Maui and all the islands where we operate out there, and bad weather or those kinds of events are going to happen from time to time, and we get paid to work through them. Operator: The next question comes from Trey Bowers with Wells Fargo. Raymond Bowers: A couple of questions. First one, just a point of clarity. I think you guys said in the prepared remarks that the asset dispositions would not be included in the adjusted free cash flow calcs. Then there was -- it looks like there was $50 million of add-back in the adjusted free cash flow in the press release. I just wanted to make sure I understand the build of that line item. Jason Marino: Yes, Trey, that's right. Going forward, any future dispositions would not be included. When we gave the guidance for this year, we did say that we would include the sale of the Westin Cancun because that was slated as inventory in the future. That is the way that we did it for that first quarter. In connection with that sale, we also entered into a purchase commitment for future inventory in Puerto Vallarta, and that was another reason that we put in adjusted free cash flow because that inventory spend in the future will obviously hit free cash flow down the road. Raymond Bowers: Then just any update on the modernization efforts? Any change to the expectation for the dollar value there? Then maybe just if you guys could just dig in a little bit on what about those modernization efforts are transitory in nature as an operating expense? Matthew Avril: This is Matt. A couple of comments on that. As we chatted last quarter, we are incorporating benefits from modernization as well as management waking up every day how to improve the business in our guidance and in our actual results. I would say the other way to also look at modernization, there was a lot of what I would call design and architecture and trying to identify things in last year's work. This year's work is really in the implementation of those that we have identified, and that work is underway. We identify it from both an expense and capital spend perspective. We're not going to call out separately those dollars as they're showing up in our P&L, but they are benefiting our business today, and we expect them to benefit going forward. There will be other initiatives that we're layering into just call it, our project management and improve the business daily mantra. Those are a couple of brief comments I would add. There's been a big shift from assessment and evaluation to implementation on those initiatives we have emphasized and prioritized. For those that we have deferred, the benefits of that is reducing the cash flow associated with the deferred items. Operator: [Operator Instructions]. Our next question comes from Stephen Grambling with Morgan Stanley. Stephen Grambling: Actually, 2 follow-ups. First, peers have culled their management base recently in terms of their -- the properties they're managing. Do you have a similar opportunity that you're looking at? Are there any properties where you still have low occupancy or even pent-up maintenance CapEx that you could look to potentially optimize? Matthew Avril: Stephen, this is Matt. Fundamentally, that is not an area of focus or need from our perspective. In our portfolio of resorts, we're excited about all of them. We've got 1 or 2 that we'll look at from time to time, but from a systemic, we've got a clear demonstrable batch of resorts, if you will, and respecting each of us have arrived in our portfolios through different mechanisms, whether how much has been purpose-built how much people may have acquired over time, I can understand why it was a priority elsewhere. I would tell you, no, that is not a high-priority opportunity for us. Our opportunity is with the quality of our resorts that we have, the high GSS scores and the high levels of occupancy that we experienced throughout our portfolio. Stephen Grambling: Then as you're thinking about ramping up sales and trying to incentivize owners, I guess, are you changing the way that you underwrite or even as you think about the percentage that you allow people to put down, is there any change in that requirement as you look at either existing owners who maybe have built up equity or new? Jason Marino: Yes, Stephen, this is Jason. We're not changing any of our financing programs in terms of down payments. We've had the minimum debt 10% down payment now for a while, consistent with the industry, and so we're not changing anything in that regard. Owners can use their existing upgrade, again, common within the industry to use their existing equity and their existing ownership to use that as partial down payments or full down payments if they have enough in new deals, so that's not a change though. Operator: At this time, I would like to turn the floor back to Matt Avril for closing remarks. Matthew Avril: Thank you for joining us on our call this morning. It's been 6 months since I joined, and we've made significant progress executing our plans. During the first quarter, we implemented a series of actions to improve our performance. As we move forward with our plans, we will begin to see stronger contract sales, profitability, cash flow and EBITDA growth. I want to specifically thank our Marriott Vacations associates throughout the company. It has been a period of rapid and substantial change, and our teams are rallying to the vision and priorities we have. On behalf of all of our associates, owners, members and customers around the world, I want to thank you for your continued interest and support of the company. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Good day, and welcome to the Willis Lease Finance Corporation First Quarter 2026 Earnings Call. Today's conference is being recorded. We would like to remind you that during this conference call, management will be making forward-looking statements, including statements regarding our expectations related to financial guidance, outlook for the company and our expected investment and growth initiatives. Please note these forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect WLFC's views only as of today. They should not be relied upon as representative of views as of any subsequent date, and WLFC undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect WLFC's financial results, please refer to its filings with the SEC, including, without limitation, WLFC's most recent quarterly report on Form 10-Q, annual report on Form 10-K and other periodic reports, which are available on the Investor Relations section of WLFC's website at www.wlfc.global/investor-relations. At this time, I would like to turn the conference over to Mr. Austin Willis, CEO. Please go ahead, sir. Austin Willis: Thank you, operator, and thank you all for joining us today to discuss Willis Lease Finance Corporation's First Quarter 2026 Financial Results. On our call today, I'm joined by Scott Flaherty, our Chief Financial Officer. We have posted an accompanying presentation on our website to give further details supporting our remarks. This morning, I'd like to start by taking a step back and discussing our industry's macro environment. Since the conflict began in Iran, we haven't seen a material impact on pricing or lease rates. Demand remains robust. We have minimal exposure in the Middle East, where the effects are being felt most acutely. Airlines are reacting to higher fuel prices and the prospect of fuel shortages by reducing capacity, in some cases, flying less frequently and in other cases, parking aircraft. Should high fuel prices persist into the fall, we expect the airlines to feel liquidity pressure. Historically, we have been countercyclical in such environments. When airlines are trying to preserve cash, they tend to opt for leasing solutions rather than overhauling engines for $10 million or more, which drives up utilization in our portfolio. We have seen this phenomenon firsthand following prior periods of macro disruption. If fuel prices remain elevated longer than anticipated, some of the parked aircraft will likely be retired, and that could lead to lower lease rates and values for midlife aircraft. We would expect changes in midlife engine values to be more resilient than aircraft as they will continue to support shop visit avoidance, as I described earlier. However, and even in spite of this, we consider ourselves to be well hedged with over 50% of our engine portfolio in modern technology, specifically the LEAP, GTF and GEnx engine types. Another way for airlines to address short-term liquidity concerns is the sale and leaseback transactions for their unencumbered aircraft and engines. Our capital strategy over the past year has positioned us well to capture such opportunities. Turning to the quarter. We ended with $4.1 billion of assets under management, approximately $1.5 billion of capital that is ready to deploy through our discretionary funds and capital through our joint ventures to include a $750 million revolving credit facility. This, combined with undrawn amounts in our recently expanded $1.75 billion revolver and our low net leverage of 2.7x, we are positioned for significant growth. As we have talked about in prior quarters, the aviation market remains increasingly engine-centric, and that dynamic is driving demand across our platform. Engine availability remains a key constraint to both delivering new aircraft and keeping operational aircraft flying. And we continue to see extended maintenance timelines and sustained pressure on spare engine supply. This environment supports strong lease rate dynamics and ongoing demand for our leasing and services offerings. Continued strong demand for our products and services helped us deliver first quarter adjusted EBITDA of $124 million and fully diluted earnings per share of $3.26 as compared to $2.21 during the same period in 2025. We have also seen strong stock price appreciation during the first quarter despite market volatility driven by geopolitical uncertainties. We attribute this primarily to the strength of our underlying business as well as investors' confidence in our growth strategy, both on and off balance sheet. This strategy will deliver synergistic benefits through fees and carried interest, along with additional advantages such as a larger asset base that we can service through our two engine MROs, our airframe MRO, our parts business and our consulting business. Let me take a few minutes to discuss the 3 key areas of our business: leasing, Willis Aviation Capital and services. First, leasing. Leasing utilization for the quarter was up to 86% from 80% year-over-year, and the lease rate factor of our on-lease assets was 1.04%. As mentioned earlier, we continue to modernize the portfolio towards the next generation of assets. And although higher in value, we are experiencing similar lease rate factors as compared to the current generation of assets. These factors led the company to experience an all-time high lease rent revenue during the first quarter of 2026, totaling $77 million, demonstrating the strength of the aviation market, demand for next-generation assets and improved lease rate dynamics. We are able to effectively optimize asset placement across global customer base through our programs such as ConstantThrust. Under ConstantThrust, operators' engines are seamlessly exchanged with fully serviceable replacements from our pool of owned and managed assets as they come off-wing. This program specifically leverages WLFC's global expertise in spare engine provisioning, technical management and maintenance and repair services to ensure uninterrupted operational performance for airlines worldwide. Earlier this year, we expanded our constant thrust program by signing a new purchase and leaseback agreement with Nauru Airlines for CFM56-7B engines. The agreement will provide Nauru with reliable constant thrust support for the airline's entire fleet of CFM56-7B engines, powering Boeing 737-700 and 800 aircraft for 6-plus years. Turning to Willis Aviation Capital, or WAC. Last quarter, we announced Willis Aviation Capital, which is a natural extension of our business and enables us to manage third-party capital alongside our balance sheet and significantly expand our addressable market. This creates a flywheel effect where greater scale drives more opportunities to deploy our services across a larger asset base, enhancing returns and accelerating platform growth. Through our partnerships with Blackstone Credit & Insurance and Liberty Mutual Investments as well as our existing joint ventures, Black now manages more than $2.7 billion of committed or deployed capital. In the first quarter of 2026, we funded approximately $90 million of finance leases through our Liberty Mutual Fund, which do not generate gain on sale as these were par sales to the fund. In April, we began selling operating lease engines from our balance sheet to the Blackstone fund. We are encouraged by the early traction we're seeing with a solid pipeline of opportunities as we move through the year. This platform is designed to generate high-quality recurring earnings through the management fees and carried interest while also driving incremental demand for our services capabilities. And finally, services. Our services businesses remain a core strength for our platform, reducing both off-wing time across our fleet and turnaround times for our own customers' assets as compared to larger MROs. As I've mentioned before, the outlook for engine shop visits remains strong through the mid-2030s and our services businesses remain a key differentiator, playing a critical role as engine maintenance demand grows. Having multiple geographically distinct hospital shops, we are well positioned to capitalize on demand across those markets since we are the low-cost alternative to more costly full overhauls. To meet growing demand for the technical and maintenance expertise of our engine shops, which contributed revenue of $10 million in the first quarter. Exclusive of intercompany sales and to enhance our vertical integration, we continue to invest in deepening our in-house technical capabilities. In February, we announced the successful completion of our first core engine restoration of the CFM56-7B in our U.S.-based Willis Engine repair center. We have branded this new capability as Willis Module Shop, allowing us to complete comprehensive core restorations that reduce maintenance cost, improve turnaround time and strengthen the control over our assets. Over time, we believe this capability will be an important driver of both operational efficiency and portfolio returns. Now to touch briefly on our capital deployment priorities. To support future growth across our platform, we have increased our financial flexibility through an amendment and extension of our revolving credit facility from $1 billion to $1.75 billion. The amended facility positions us with the liquidity and flexibility to further expand our business. Additionally, we closed 2 Japanese operating lease with call option or JOLCO transactions, totaling approximately $50 million. These transactions reflect the strength of our lender relationships and our ongoing focus on maintaining a well-capitalized flexible balance sheet. Scott will speak to the specifics of these transactions momentarily. We have also continued to invest in top talent where we see growth opportunities, particularly in the Asia Pacific region. We welcomed Marilyn Gan as Head of Origination for the region, strengthening our ability to source and execute opportunities in a key growth market. Looking ahead, we remain well positioned to deploy capital across a broad range of opportunities. We see attractive prospects across leasing and services, supported by strong long-term fundamentals in the aviation market. We also remain committed to returning capital to our shareholders as evidenced by the quarterly recurring dividend of $0.40 per share that we declared earlier this quarter. Overall, we are confident in our strategy and the progress we are making as we continue to scale our platform and deliver long-term value for our shareholders. And with that, I'll hand it over to Scott Flaherty, our CFO, to discuss our financial performance in greater depth. Scott Flaherty: Thank you, Austin, and good morning all. Another strong quarter for Willis Lease Finance. Our first quarter experienced record quarterly lease rent revenues of $77.4 million, quarterly adjusted EBITDA of $123.8 million, $36.8 million of quarterly earnings before taxes, or EBT, and $23.7 million of net income attributable to common shareholders or $3.26 of diluted weighted average income per common share. Walking through the P&L, our strong top line performance reflected solid growth in nearly every revenue channel, record lease rent revenues of $77.4 million in the quarter. 14.2% quarter-over-quarter growth in lease rent revenues were driven by a combination of increased portfolio size, utilization and lease rates. Our owned portfolio at the end of the first quarter was $2.86 billion. Our own portfolio is reflected on the balance sheet as equipment held for operating lease, maintenance rights, notes receivable and investment in sales type leases. Average utilization was up from 79.9% in Q1 of 2025 to 85.8% in Q1 of 2026, a nearly 6-point pickup. Additionally, we continue to see a solid average on-lease lease rate factor across the portfolio of 1.04% compared to 1.0% in the first quarter of 2025. Maintenance reserve revenues for the quarter were $55.5 million, up slightly from $54.9 million in the first quarter of 2025. $12.4 million of these maintenance reserve revenues were long-term maintenance reserve revenue associated with engines coming off-lease and the associated elimination of any maintenance reserve liabilities as well as the receipt of end of the lease cash payments. $12.3 million of this related to one engine coming off-lease and included both the release of a maintenance reserve and the receipt of an end-of-lease cash payment. The $12.4 million in long-term maintenance reserve revenue compared to $9.6 million in the first quarter of 2025. $43.1 million of our maintenance reserve revenues were short-term maintenance reserves compared to $45.3 million in the prior comparable period. Spare parts and equipment sales increased by $3.4 million or 18.9% to $21.7 million in the first quarter of 2026 compared to $18.2 million in the first quarter of 2025. Spare parts sales were $10 million and $16 million in Q1 of '26 and 2025, respectively, a decrease of $5.8 million. The decrease in spare parts sales reflects variations in the timing of sales to third parties and were not reflective of $7.5 million of intercompany sales, which was up from the prior comparable period and eliminated in our financial consolidation. These intercompany sales represent the added value of having a vertically integrated parts business. Equipment sales in the first quarter of 2026 were $11.4 million, up $9.2 million from the prior comparable period. These revenues reflect the sale of 3 engines that were not previously leased. The trading profit on sale of these 3 engines was $5.7 million, representing a 50% margin on these sales, validating the significant discount that exists between the book value and the market value of our portfolio. Equipment sales for the 3 months ended March 31, '25, were $2.2 million for the sale of 1 engine. Gain on sale of leased equipment, together with our gain on sale of financial assets, a net revenue metric, aggregated to $18.4 million in the first quarter, up $13.6 million from the $4.8 million in the comparable prior period. The $18 million gain on leased equipment was associated with the sale of 14 engines for $60 million of gross sales. Included in our engine sales were 5 engines sold to our Willis Mitsui joint venture. The gain on sale represents an effective 30% margin on such sales, further validating the significant discount that exists between the book value and the market value of our portfolio. The company recognized $0.4 million of gain on sale of financial assets where we sold 11 notes receivable and investment in sales-type leases for $87.1 million of gross sales, which generally reflects car sales of these financial assets. Maintenance services revenue, which represents fleet management, engine and aircraft storage and repair services and revenues related to management of fixed base operator services was $9.8 million in the first quarter of 2026, up 74.9% from $5.6 million in the comparable period in 2025. The increase reflects growth in engine and aircraft storage and repair services, especially when factoring the lack of comparable period fleet management revenues in the current period due to the sale of our BAML business in late Q2 2025. Gross margins grew to 9.3% from 4.6% in the prior comparable period. Our maintenance service offering enhance our customer program solutions and provide vertical integration to increase the profitability of our owned and managed assets. Management and advisory fees represent the fees generated through our asset management efforts. These fees include those made from our joint ventures and other managed assets as well as through our new fund strategy announced at the end of 2025. Management and advisory fees increased by $5.9 million to $7.9 million for the 3 months ended March 31, 2026, from $2 million for the 3 months ended March 31, 2025. This increase was primarily driven by $4.9 million of fees earned from our LMI or Liberty Mutual Fund in the company's role as general partner. The LMI fund commenced operations in March of '26 and reimbursed formation and other costs to the company, which flowed through both revenue and the G&A lines of our P&L. On the expense side of the equation, depreciation in the first quarter increased by $5.2 million or 20.6% to $30.2 million as compared to $25 million in the prior comparable quarter. The increase is primarily due to an increase in the size of our lease portfolio and the timing of placing acquired engines on lease, which starts their depreciation through the P&L. Write-down of equipment was $1.1 million in the first quarter, reflecting the write-down of 1 engine. There was $2.1 million of write-downs of equipment for the 3 months ended March 31, 2025, reflecting the write-down of 5 engines. G&A expenses increased by $8.9 million or 18.6% to $56.6 million in the first quarter of 2026 compared to $47.7 million for the first quarter of the prior comparable period. The increase primarily reflects a $12.5 million increase in personnel costs, which included an increase of $6.9 million in share-based compensation and an increase of $4.1 million in wages. The increase in share-based compensation reflects appreciation of the market value of the company's equity as well as share awards to new personnel to support the continued growth of the company. In January of '25, the company modified its share-based compensation program due to the significant rise in our stock price. The nearly 300% increase in the company's stock price since mid-2024 had a P&L effect as the company's historical plan was structured with predetermined share grants occurring after the achievement of specified goals or performance metrics. Generally, the share grants had a 3-year vesting, which created a noncash P&L effect over the vesting period. Our new share-based compensation plan will reduce share-based compensation expense savings, but such savings will not be fully realized until prior grants flow through the P&L. The $4.1 million increase in wages was driven by higher headcount to support the company's growth. Also contributing to the higher G&A cost was $4.9 million of costs, which were recharged to the LMI fund, with the associated revenue of $4.9 million included in management and advisory fees. Lastly, G&A also included $2 million increase in acquisition, financing and divestiture-related expenses as compared to the prior period. Partially offsetting these increases was an $11.7 million reduction in project expense due to our decision to cease investment in and pursue strategic alternatives for the sustainable aviation fuels project. Technical expense was $9.7 million in the first quarter, up from $6.2 million in the comparable period of 2025. Technical expense generally relates to unplanned maintenance, whereas engine performance restorations tend to be planned and capitalized events. Net finance costs were up $7.6 million to $39.7 million in the first quarter compared to $32.1 million in the comparable period in 2025. The increase in costs was predominantly related to $7 million in loss on debt extinguishment related to refinancings completed in the quarter. Less than $1 million of the $7 million was a cash expense as the lion's share was related to an acceleration of previously incurred capitalized issuance costs. Total indebtedness remained relatively flat at $2.25 billion as compared to $2.23 billion in the comparable period of 2025. Our weighted average cost of debt capital, inclusive of swap agreements was 5.12%. The company also picked up $3 million in ratable earnings from our investments, which include our joint ventures and fund interests. Income from investments was up 126% and most significantly influenced by our Willis Mitsui joint venture. The company produced $23.7 million of net income attributable to common shareholders, which factors in GAAP taxes and the cost of our preferred equity, which was up 52.9% from the comparable period in 2025. Diluted weighted average income per share was $3.26 per share in the first quarter, up 47.5% from the $2.21 in the first quarter of 2025. Adjusted EBITDA for the quarter of 2026 was $123.8 million, up 19.9% from $103.3 million in the first quarter of 2025. We believe that our adjusted EBITDA reflects the normalized cash flow generation of the Willis enterprise. Our adjusted EBITDA makes adjustments to our net income attributable to common shareholders for income tax expense, interest expense, preferred stock dividends and costs, loss on debt extinguishment, depreciation and amortization expense, stock-based compensation expense, write-down of equipment, acquisition financing and divestiture-related expenses and other discrete gains and expenses. Net cash provided by operating activities was up 38.3% to 56.7% in the first quarter of 2026 as compared to $41 million in the first quarter of 2025. The increase was predominantly related to increased net income, the noncash effects of stock-based compensation, depreciation and the loss on debt extinguishment expenses and a period-over-period $10 million increase in cash flows from changes in other assets. On the financing and capital structure side of the business, the company completed its seventh and eighth JOLCO financings in the first quarter, bringing total JOLCO financings at quarter end to approximately $170 million. In March of 2026, the company amended and extended its existing revolving credit facility, increasing total commitments from $1 billion to $1.75 billion and extending the maturity out to April of 2031. The expansion of our credit facility provides Willis with increased liquidity and flexibility to pursue our growth strategy. Concurrent with the $750 million expansion of our credit facility, we terminated our $500 million warehouse facility. We regularly access the capital markets as we endeavor to source competitively priced capital to help continue to grow our balance sheet and P&L. In February, we paid our seventh consecutive regular quarterly dividend of $0.40 per share. Subsequent to quarter end, our Board of Directors declared our eighth consecutive recurring quarterly dividend of $0.40 per share, payable to holders at May 11, 2026, on May 22, 2026. Our recurring dividend provides shareholders with a moderate current cash yield on their investment while not degrading the strong cash flow of our business. With respect to leverage, as defined as total debt obligations, net of cash and restricted cash to equity, inclusive of preferred stock, our leverage ticked lower to 2.68x at the end of the first quarter of 2026. We have made significant strides over the last several years to reduce leverage to position Willis to be able to access market opportunities when they become available. With that, I will hand the call back to Austin. Austin Willis: Thank you, Scott. Q1 set in motion great momentum for the year ahead as we track towards our long-term strategy. growing our portfolio on balance sheet and managed assets through Willis Aviation Capital while bringing exciting opportunities to the entire Willis platform. Thank you for joining us on our call today. And with that, I will let the operator open up to Q&A. Operator: [Operator Instructions]. We'll go to Will Waller with M3F. William Waller: Excellent looking quarter. I was wondering if you could comment a bit more on the asset management business, like the Blackstone funds and so on. What the management fee and incentive fee will look like, if there's kind of any general parameters that you could give out as it relates to that? Austin Willis: Will, thanks for the question. So in terms of the funds, we're not disclosing what the specific management fees are. But I can tell you that they're roughly in line with what's standard for discretionary funds, a percentage of the value of the assets managed and then a percentage of the profitability via carried interest. We started deploying capital into Liberty Mutual in the first quarter, and you're really going to start to see the fees from that come in when we deploy more capital over time. And with respect to Blackstone, I think you'll start to see fees kicking in here in the next quarter. And as I mentioned earlier on my prepared remarks, we started to deploy capital there in April, so just subsequent to the quarter. I think we're probably going to see about $200 million from our balance sheet into the Blackstone portfolio. So that's a good starting point and then hopefully get the remainder deployed in relatively short order. William Waller: Great. That's super useful to hear, and we think it's a very wise strategy and that you're using all your knowledge to the fullest. So we really think highly of that strategy. So thanks for that additional information. Operator: With no other questions holding, I'll turn the conference back for any additional or closing remarks. Austin Willis: Thank you very much. We appreciate everybody giving us their time today. And I guess we answered all the questions in our lengthy prepared remarks. So thank you very much. Take care. Operator: Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Centerspace Q1 2026 Earnings Call. [Operator Instructions] I will now hand the call over to Josh Klaetsch, Director of Investor Relations. Please go ahead. Joshua Klaetsch: Thank you, and good morning, everyone. Centerspace's Form 10-Q for the quarter ended March 31, 2026, was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package have been posted to our website at centerspacehomes.com and filed on Form 8-K. It's important to note that today's remarks will include statements about our business outlook and other forward-looking statements that are based on management's current views and assumptions. These statements are subject to risks and uncertainties discussed in our filings under the section titled Risk Factors and in our other filings with the SEC. We cannot guarantee that any forward-looking statements will materialize, and you're cautioned not to place undue reliance on these forward-looking statements. Please refer to our earnings release for reconciliations of any non-GAAP information which may be discussed on today's call. I'll now turn it over to Centerspace's President and CEO, Anne Olson, for the company's prepared remarks. Anne Olson: Thank you, Josh, and good morning, everyone. I'm here with our SVP of Investments and Capital Markets, Grant Campbell; and our CFO, Bhairav Patel. I'll start by addressing the strategic review which we initiated in 2025. This process is ongoing, and we appreciate the feedback we have received from our stakeholders. The Board and its advisers continue to make progress, and we expect to provide shareholders with a more substantive update on the status of the review process before or in connection with our second quarter earnings release. There can be no assurance as to the timing or outcome of our process and no assurance that the review process will result in a transaction or other strategic change or outcome. We do not intend to provide further details in connection with discussion of our first quarter earnings results today. Thank you for your understanding as we keep our comments focused on our results and our outlook. Our revenues for Q1 were in line with our expectations, supported by stable demand and continued execution by our leasing teams. First quarter results reflect the negative impact of recent changes to Colorado regulations, timing of certain expenses and costs related to our strategic review. These were anticipated, and our expectations for full year core FFO and its drivers remain substantially unchanged. We are reiterating our previously released earnings guidance, and Bhairav will discuss this momentarily. Operationally, we are starting to see the expected seasonal pickup in leasing. While blended leasing spreads in the quarter were up 40 basis points over prior leases, each month demonstrated improvement, increasing from negative 90 basis points in January to positive 140 basis points in March. We've seen this trend continue into April with preliminary blended spreads of 1.8%. The Q1 blend was composed of a 2.1% decrease in new lease rents, combined with a 3.1% increase on renewals, while in April, new lease spreads broke into positive territory and renewal spreads increased to 3.3%. Retention of 54.1% in our same-store portfolio was a 2 percentage point improvement from the same quarter last year, and our resident base remains healthy, with rent-to-income levels at 21.2% and bad debt within our historical range. Our Midwest markets continue to see rent growth outpacing national averages, and our largest market of Minneapolis saw blended spreads of 1.3% in Q1. Notably, Minneapolis has shown the best acceleration into April with blended spreads of 3.8% and new lease spreads of 4.3% in the month. In Denver, Q1 blended rates were down 5.1%, and reimbursement revenues are exhibiting the impact of regulatory changes in the market. Concessions are prevalent in the market, and we experienced our highest usage of concessions to date in Q1. That said, we have reason for optimism. Q1 absorption levels were at their highest level since the pandemic rebound in 2021, and retention in our Denver communities was 51.9%, an improvement over Q1 2025. This data, together with the significant drop-off of new construction starts, sets us up for a better leasing profile as the year progresses, with improvement in both concessions and leasing spreads expected as we enter peak leasing season. Expenses in the quarter were higher than our historic trend or 2026 projected run rate. Much of this was related to timing, which Bhairav will elaborate on. Our team excels in expense management, as evidenced by our same-store expense growth of only 1.6% over 2024 and 2025, and we expect that discipline to show again in 2026 as the impacts of onetime expenses normalize. I would be remiss not to recognize our team. Their commitment and execution sets us apart, and we're proud that their efforts have been recognized through several awards, most recently being named a USA Today Top Workplace. I'm very grateful for our amazing team members. With that, I'll turn it over to Grant. Grant Campbell: Thanks, Anne, and good morning, everyone. Nationwide transaction activity continued showing signs of improvement, including a 13% total volume increase in 2025 compared to 2024. At the same time, investors are becoming increasingly selective with their investment decisions. There is a wide variation across individual markets as it pertains to investor conviction and actions. Within our geographic footprint, this dynamic exists. In Minneapolis, 2025 was a record year for transactions at $2.5 billion in total volume. This is driven by supply peaking in 2023, and at the peak, new deliveries representing only 6% of then existing stock, comparing favorably to the profile of high supply markets. Coupling this with stable and persistent renter demand, investors have been drawn to the market, and we expect this to continue throughout 2026, in part due to next 12-month deliveries representing 1.6% of existing inventory and the full construction pipeline at 2.1% of inventory. In our other Midwest markets, we continue seeing strong interest from private capital investors. These markets are anchored by health care, education and government and have muted supply profiles, including next 12-month deliveries ranging from 0% in our North Dakota and Rochester, Minnesota markets to 2.4% of existing inventory in Omaha. While the labor market has slowed nationally, we are seeing healthier relative performance in these locations, including in Grand Forks, North Dakota, where the U.S. Space Force is expanding its presence and a new $450 million food processing facility is underway, along with Rochester, Minnesota, which saw strong job growth in 2025, driven by health care and education. Shifting to Denver. Transaction volume was down 41% in 2025 compared to 2024, and this has carried into 2026 thus far. The market continues working through the influx of deliveries from the past 24 months, flat job growth in 2025 and the recent legislative changes affecting property level other income. This has generally put Denver's transaction market in a wait-and-see environment. Premium assets and locations are still commanding strong pricing, including a few recent trades at sub 5% in-place cap rates, though the divide between premium profile and the rest of the market has widened. We believe this theme will continue until growth indicators translate into hard data, providing investors more conviction in underwriting strengthening fundamentals. Strong Q1 absorption numbers are one building block. Taken together, we think this environment reinforces our historical focus on disciplined capital allocation. We expect household formation in our portfolio to outpace national averages by 50 basis points through the end of next year and employment growth to similarly outpace the U.S. We believe this positioning will allow us to navigate the current environment while creating value over time. I'll now turn it over to Bhairav to discuss our financial results and guidance. Bhairav Patel: Thanks, Grant, and hello, everyone. Last night, we reported first quarter core FFO of $1.12 per diluted share, driven by a 1.1% year-over-year decrease in Q1 same-store NOI. Revenues from same-store communities were flat compared to the same quarter in 2025, with a 1.7% increase to average monthly rental rate in the portfolio offset by a 40 basis point decrease to occupancy and the impact of lower RUBS revenue in our Colorado communities. On the same-store expense side, Q1 numbers were up 1.7% year-over-year, with controllable expenses up 3.5% and noncontrollables down 1.1%. Our G&A expenses increased by $1.3 million over the same quarter last year, with strategic review costs as the main driver of that increase. Turning to full year 2026 expectations. Our guidance is consistent with what we outlined in February with core FFO at $4.93, same-store NOI growth of 75 basis points, same-store revenue growth of 88 basis points and same-store expense growth of 1.5%, each at the midpoint of their guided range. Casualty recoveries in Q1 led us to increase our NAREIT FFO expectations for the year by $0.03 at the midpoint to $4.78 per share. Revenue growth assumes blended gross leasing spreads of approximately 2%, with occupancy in the mid-95% range and retention of about 52%. We continue to expect blended spreads will again be highest in our Midwest communities. That strength will bolster our Denver portfolio, where we expect spreads to be down for the year, though improving as the year progresses. As we have previously stated, regulatory changes are expected to temper revenue growth in our Colorado portfolio, with RUBS expected to be down nearly $1 million, which was already incorporated into our initial guidance. As Anne alluded to earlier, expenses in the first quarter were slightly higher than our expectations. However, part of that increase was driven by timing differences, especially on the noncontrollable side. We recorded approximately $400,000 in real estate tax true-ups during the quarter. True-ups are not uncommon during the first quarter, and we expect these to be offset when we resolve open appeals in the second half of this year. Our nonreimbursable losses during the quarter were also slightly higher than anticipated. This line item tends to be volatile, and our first quarter experience has not altered our expectations for the full year. Controllable expenses were impacted by a low team member open position count and the timing of R&M projects. We expect offsets to both will favorably impact the cost of these for the remainder of the year. Lastly, while G&A during the quarter was higher than the projected run rate for the rest of the year, we now expect full year G&A to be lower than our initial projection. As a result, we still expect to deliver financial performance within the initial guidance ranges we discussed at the beginning of the year. To further aid in modeling, I wanted to highlight our expectations for certain line items and related timing. Costs related to our strategic review are expected to be $1 million to $1.5 million for the year, with those costs expected to occur primarily in the first half of the year. This expense appears in both our G&A costs and has an add-back from FFO to core FFO. Amortization of assumed debt is expected to be $1.3 million for the year, with $490,000 expected in Q2 before quarterly amortization decreases to $215,000 per quarter in Q3 and Q4. Our guidance does not include any acquisitions or dispositions. Turning to our balance sheet. Q1 annualized debt-to-EBITDA was impacted by the higher G&A and taxes in the quarter, leading it to be atypically high. This is not indicative of any meaningful change to our leverage profile, and we expect this number to return to our historical mid-7x range as the year progresses and expenses normalize. Our debt schedule features both a compelling rate and a long tenure with a weighted average rate of 3.6% and weighted average maturity of 6.7 years, while our liquidity remains strong with $267 million of cash and line of credit availability compared to $98 million of debt maturing through 2027. To conclude, this quarter demonstrated the stability and consistency of our portfolio, with our results demonstrating our commitments to both operational excellence and financial discipline and positioning us well for the rest of 2026. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Brad Heffern of RBC. Brad Heffern: On Minneapolis, it sounds like you're seeing a strong inflection in spreads there. Do you view that market as being sort of back to normal at this point after we've passed all the supply? And then do you expect to see it overshoot to the upside to some extent? Anne Olson: Yes. I think you're exactly right, how we feel about it. We are certainly past the inflection point where the demand has stayed steady and the supply has been significantly absorbed and the new supply pipeline, as Grant discussed, is tapering to just over 2%. And so we're seeing really good rent increases there, and we think that, that will continue. We have no indicators that demand is softening here in Minneapolis. And the economy -- the regional economy here is healthy. So we do expect some outperformance from Minneapolis this year, particularly relative to our other markets. Brad Heffern: Okay. Got it. And then, Bhairav, on the guidance, 1Q was at the bottom end of the revenue growth guidance range. The expenses in 1Q were close to the top end of the range. Obviously, you didn't change the guidance, but I'm curious if you can just walk through the path to both of those getting to their midpoints? Or do you expect that NOI maybe won't get to the midpoint, just based on where we are so far? Bhairav Patel: Yes, let's go through the components. So revenue was still in line with our expectations. It was flat for the quarter, but we expected it. The increase in scheduled rent was offset by the loss of RUBS revenue in Colorado, and there was amortization and concessions that started in the second half of last year. But overall, revenue came in, in line with expectations, and April is shaping up also in line with expectations. We do expect that remains on track. On controllables, R&M was slightly higher in the first quarter. Some of that was timing, which will correct itself. And the remainder, we expect to offset with savings elsewhere. And we are fully staffed now, so we expect to be able to drive efficiencies as we enter leasing season by better managing overtime spend and third-party vendors. So we do expect that we'll kind of remain on track on controllables as well. With respect to noncontrollables, there were some tax true-ups in the first quarter. It's not unusual for us to see tax true-ups in the first quarter. We do expect some fuel savings to materialize in the second half of the year, so that should offset it. And also, as I said in my prepared remarks, there were some nonreimbursable losses, which again tend to be volatile. So we saw higher losses in the first quarter, which is not really indicative of the run rate going forward. So that should normalize as well. Lastly, there's G&A. That was also higher than the run rate. It was driven by some payroll tax accruals that are typically higher in the first quarter when we grant the equity awards. That should also normalize as we go through the rest of the year, and we actually did identify some additional savings. So overall, then you kind of combine all of these components, we expect to remain in line with the midpoint of our NOI as well as core FFO. Operator: Your next question comes from Ami Probandt of UBS. Ami Probandt: Just to dive in a little bit more on the markets. The other Mountain West markets are a relatively small part of the portfolio, but growth in the quarter was pretty soft. So I was wondering if you could talk through what's going on there? Anne Olson: Yes, sure. So the other Mountain West consists of Rapid City and Billings. And those markets, if you recall, are acting a little bit more like a Denver. So they had enormous rent growth in '21, '22 into '23, but then they did get some supply. And so being smaller markets, they have been impacted a little bit by supply. That is tapering off. And as Grant noted, we see very little supply coming there. But that market really has had some equalization going on there as they work through that supply. And then also a little bit softer job picture there. Immediately post COVID, they had a pretty big influx of people working remotely, particularly in places like Rapid City. And so we've seen that pull back a little bit. The market is still strong, but we're not seeing the growth that we had been there. We've had a little bit of a pullback in those markets. Ami Probandt: Got it. That makes sense. And then just on retention, this has been really strong, remains ahead of historical. I was just wondering if you think that retention might come down at all and to what extent it might come down as you change over to pushing a little bit more on rate as we move into the peak leasing season? Anne Olson: Yes, this is a great question. I think the market has changed the last couple of years across the industry, we've really seen higher retention. So you're hearing that from all the multifamily peers. You're hearing that on the private side. Whether or not that there's some fundamental shift there, I think people are starting to lean into that, right? The renters are staying renters longer. The average age of a renter is increasing. And so I think there's a higher percentage of renters in the market, which is helping retention. Now as we look into this year, the one thing that we're really looking at is with a lot of absorption coming and a lot of absorption happening, there's actually going to be fewer choices for people to move to. And one of the things we noted is while retention was really strong in Q1, it actually jumped up pretty significantly in April. So I guess I'm -- my early leaning is that this is a little bit of a fundamental shift in the industry away from that 50% general retention rate into something a little bit higher. Operator: [Operator Instructions] Your next question comes from the line of Jeffrey Carr of Cantor Fitzgerald. Jeffrey Carr: Just wanted to ask about with the review ongoing and no acquisitions or dispositions in guidance, how are you thinking about capital allocation priorities for the rest of the year? And specifically maybe around the revolver balance and value-add spend? And how much does the review kind of influence those decisions, if at all? Anne Olson: Yes, this is a great question. I think capital allocation is job #1 of an executive team, and particularly when you have hard assets. And we -- while we maintained our guidance on value-add for the year and we do think that, that's an important part of our program here and our operating platform, really, most of the value-add that we're spending is are things that were started or identified last year. So as we think about capital allocation priorities going forward, we're very focused on managing the line of credit debt and keeping our balance sheet strong and flexible. Operator: Your next question comes from the line of Mason Guell of Baird. Mason P. Guell: Has there been any change to the outlook for any of your markets this year? And are any doing better or maybe worse than expected? Anne Olson: Well, as Bhairav said, we really expect revenue is coming in line with expectations, and that's unchanged for the year. I think maybe the components are moving a little bit. We'd like to see Denver picking up a little bit faster, but -- and they had awesome absorption in Q1, as we discussed in the prepared remarks. And if that continues, we're going to be right in line there. Minneapolis is a little bit better than we expected, but these are all very slight offsets. And overall, I think revenue is coming in right where we thought, and we expect that to continue for the year. Mason P. Guell: Great. And then could you provide some color on the real estate investment impairment line item on your income statement? Bhairav Patel: Yes, we can go through the impairment. So overall, from a GAAP standpoint, you typically book impairment when your -- on real assets when your cash flows are going to be less than your book value. Now from real assets, you don't typically tend to see it because they have long holding periods. So you usually see impairments when we have assets that are held for sale. But with the ongoing strategic review, the considerations change a little bit, and we have to kind of tweak the holding period for certain assets, which resulted in the impairment that we booked in the first quarter. It was truly driven by a change in the potential holding period in light of all the other activity that's being reviewed at the strategic level. So that's really what drove the impairment. It was on one asset and was driven by property-specific factors. Operator: Your next question comes from the line of Michael Gorman of BTIG. Michael Gorman: Maybe just a quick one for me on a more strategic level as you're thinking about the portfolio and you're thinking about the business. Obviously, Denver, I think, has been a challenge, and that's not unique to you at all. There was an article in The Wall Street Journal over the weekend talking about the regulatory environment for business in general in the state of Colorado and some increasing concerns about the regulatory burden among the tech ecosystem. And I'm just wondering, have you started to see any of those concerns? Have you started to think about those concerns and what that means for the job market in those kind of core metro areas in Colorado? Or is this just a little bit too far out on the horizon? Anne Olson: Michael, this isn't too far out on the horizon, and it is something that we're thinking about. As we consider -- you may recall when we -- before we bought in Salt Lake City, one of the things that we really look at with respect to markets is the business climate, right, the friendliness, the tax regime, the regulatory environment. In Colorado, you can even see -- and we discussed in our prepared remarks -- you can start seeing the results of some of the regulatory actions that they have taken with respect to real estate, the RUBS, the collection, our ability to get reimbursement for RUBS and utility costs. So we're already starting to see that there. And I do think that some of the other regulatory actions that they're considering or considering taking are impacting their job growth. As Grant noted, it's been flat there after a few years of really, really strong growth. So is this part of the natural kind of maturing of Denver, which went from 1 million people to close to 4 million people in a relatively short span of time? A lot of jobs came there. Did the infrastructure not keep up? Do they feel pressure to put these regulations in place? Will that abate over time? I think that remains to be seen. We're really happy with the portfolio we have there. We're very happy with the basis we have in it, having started to acquire that portfolio back in 2017. And we're optimistic because it's still a place that has a lot of cultural gravitas. People are still wanting to live there for access to the outdoor amenities and things that other cities can't offer. And on a relative basis to places like California, it is still very affordable. So -- but definitely something that we're watching, something we're already starting to feel the impacts of and really keeping a close eye on. Michael Gorman: That's really helpful color. And maybe just a follow-up. I just wanted to make sure I had it clear. It sounds like, to your point, job growth is a little bit slower in Denver, but it sounds like absorption is running at pretty high levels. So I'm just wondering, kind of what could be driving that mismatch and how durable that can -- that absorption level do you think can be with the current level of job growth? Grant Campbell: Yes. Mike, correct. Q1 absorption numbers were very strong, peak data, looking back to the pandemic period. So we continue to see strong inflows of resident and renter demand in the market. I think a big driver there is the high cost of homeownership in that market. And although job growth has been flat in 2025, as we talked about, we do continue to still see folks from out of state relocating to the market, maybe not at the same clip that they were from '21 to '23. We actually looked within our portfolio, '21 to '23, about 1/3 of our applicants within our same-store portfolio were from out of state. And in '24 and '25, that was 25%. So a reduction, but still a meaningful inflow of folks coming from out of state, and it is very expensive to own a home in that market. Operator: Your next question comes from the line of Ami Probandt of UBS. Ami Probandt: Maybe a follow-up to Mike's question that was just asked. There's maybe some bias for some coastal -- at least coastal people about what your Midwest markets might look like. And so I'm just kind of curious, what's the hiring outlook for recent college grads across your market? Do college grads, are they attractive to these markets? Or do they tend to go to some of the bigger Sunbelt markets or coastal markets and then move into the Midwest as they get a little bit older and want to start a family? Anne Olson: Yes. Ami, this is a good question. And there -- as you probably know, there has been some recent publication highlighting where the hot markets for new college grads are. Very few of them are in the Midwest, but we still do see really strong companies in our markets and across the Midwest. And so Minneapolis, we have Target, 3M, huge health care in UnitedHealthcare and all the subsidiaries, Cargill, which is one of the largest private companies in the world. And then on the North Dakota side, Grant mentioned, we're starting to see some growth there. And Grant, maybe you can just comment a little bit on what we're seeing in some of those markets with respect to job growth that would attract some of those new college grads? Grant Campbell: Yes. I think to Anne's comments on Minneapolis, 17 Fortune 500 companies, Cargill, largest private company that there is. We see a lot of folks that -- maybe Chicago used to be the place, if they were Midwest-centric, it was Chicago, or we're going coastal. We see more and more of those folks coming to the Twin Cities. A strong underlying higher education system in the Twin Cities also serves as a feeder for a lot of those organizations and companies in our backyard. In the case of our other Midwest markets that you alluded to, Rochester, the Mayo Clinic is undertaking a very significant expansion phase that is drawing a lot of folks. So that market driven by health care and education, we're seeing it play out on the ground. In our prepared remarks, we alluded to North Dakota, where we're seeing some pretty significant investment, both from folks in state as well as other folks, in this case, a European company desiring to put their first U.S. plant in that market. So I think these things, although maybe they don't register at the same level as some of the coastal updates that we hear about, the wheel is turning in these markets. Anne Olson: And Ami, just one more thought on that is when I look at recent data and recent news articles about it, it does -- there is a big highlight there, which is the new college grads aren't just looking for coastal markets and jobs. They're also balancing that with overall affordability, and that's where the Midwest can be a real draw. And over the past few years, we've seen markets like -- not just Minneapolis, but Milwaukee, Columbus, Kansas City really get an outsized share of those grads given the affordability of living there. Operator: There are are no further questions at this time. Anne Olson: Great. Well, thank you all for joining us today. We look forward to meeting with many of you at the upcoming BMO and NAREIT conferences, and we wish you all a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, and thank you for standing by. Welcome to the Portillo's First Quarter 2026 Conference Call and Webcast. I would now like to turn the call over to Chris Brandon, Vice President of Investor Relations at Portillo's to begin. Chris Brandon: Thanks, operator. Good morning, everyone, and welcome to the Portillo's First Quarter 2026 Earnings Call. With me today are Brett Patterson, President and Chief Executive Officer; and Michelle Hook, Chief Financial Officer. You can find our 10-Q, earnings press release and supplemental presentation at investors.portillos.com. Any commentary made here about our future results and business conditions are forward-looking statements, which are based on management's current expectations and are not guarantees of future performance. We do not update these forward-looking statements unless required by law. Our 10-Q identifies risk factors that may cause our actual results to vary materially from these forward-looking statements. Today's earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials. Finally, after we deliver our prepared remarks, we will be happy to take questions from our covering sell-side analysts. And with that, I will turn the call over to Brett. Brett Patterson: Thanks, Chris, and good morning, everyone. I appreciate you joining my first earnings call as President and CEO of Portillo's. It's an honor to lead this special brand and as I've observed these past few weeks, talented group of people. What drew me to this company starts with what makes it unique. At its core, Portillo's is about creating memorable experiences for our guests, supported by a strong culture of hospitality and a differentiated menu that offers craveable food. I want to take a moment to thank our team members for their candor and insights during my first 2 months as well as offer my deep appreciation to all that bring this brand to life every day. I started my career in restaurants at age 17 working on the front lines. That foundation helped shape my leadership approach and taught me firsthand that the best restaurant brands have great culture with well-trained and committed teams that genuinely care about the guest experience. My focus now is bringing those elements together into a clear, disciplined strategy that our teams can consistently execute. My key objective of these first 60 days has been to listen and learn, spend time with the teams in our restaurants and understand the business from the ground up. That includes both our new markets as well as here in our backyard of Chicago, where strong performance is important and expected. Over the next several months, my priority is to partner with the leadership team and lean on formal research and insights to build a strategy that will align the entire organization. Getting there will require relentless focus and rigor to stick to what is most important, and that's how we will deliver the memorable experience that has helped us build some of the most loyal guests in the industry for more than six decades. At a high level, that foundation centers around three areas: operational excellence as defined by a guest-centric mindset, well-trained team members and high-quality food executed the standard, served accurately and on time. An integrated and targeted approach to marketing, leveraging data and insights while fully utilizing the right platforms to drive awareness, trial, acquisition and frequency. Lastly, a disciplined development strategy that creates value. When we execute those three pillars, we believe the desired outcomes will follow: consistent year-over-year same-store sales growth and improved restaurant level profitability. Everything starts with operational excellence. It's essential that we consistently deliver a great experience in all our restaurants no matter how guests choose to use us. The best insights come straight from the source, our restaurant teams and managers. That's why I have and will continue to make it a priority to spend time with them listening to what they need to ensure the proper tools and resources are in place to deliver on this imperative. We have engaged with outside partners to execute several landmark studies for the brand, led by our Chief Marketing Officer, Denise Lauer. This critical research is focused on customer segmentation, brand positioning and menu satisfaction and will give us deeper insights to better inform our marketing strategies in our core markets as well as new and growing territories. Strong operations and marketing will complement another extremely important initiative, implementing a sound philosophy and approach to ensure a value-creating development strategy. Portillo's has significant long-term growth opportunity, which will be a key piece of our strategic road map, but it must be pursued with discipline. We will be measured in terms of where and how we grow with a clear focus on cash-on-cash returns at the restaurant level. We're fortunate that Jennifer Pecoraro-Striepling recently joined the team as Chief Development Officer. She brings vast industry experience in multiple categories to this critical function. She will be focused on evolving our new market playbook, selecting sites that drive healthy returns, exploring prototype formats and ensuring a more disciplined use of capital by safeguarding responsible building costs. Before closing, I want to briefly touch on the first quarter where we showed improvements in transactions and sales. And while I'm encouraged by these results, our teams are putting the focus and energy into building a sustainable long-term plan that will lean on the aforementioned fundamentals to drive consistent results. Michelle will speak about our first quarter and current trends shortly. But as we look ahead to the next few months, our focus is less about short-term tactics and quick hit strategies and more about building the right foundation for long-term profitable sales growth. As noted in the press release, we're comfortable with reiterating our fiscal year guidance. But as our strategic work progresses and new finance leadership was brought on board, our expectations may evolve. We will continue to provide updates as appropriate throughout the year. In closing, I developed a passion for operations early in my restaurant career. I've always believed that the top restaurant companies are built on solid fundamentals and disciplined execution led by teams that take pride in delivering best-in-class guest experiences. Bringing that passion to a brand I've admired since my first visit more than two decades ago is incredibly exciting. Our focus now is to sharpen our priorities, strengthen our ability to execute and build a credible growth story. Before I pass it over to Michelle, I want to address the announcement we made this morning regarding her decision to depart Portillo's. Michelle has been Chief Financial Officer here since 2020, playing a critical role in leading our finance function, supporting the company's IPO in 2021 and helping expand the business into new markets. We appreciate Michelle's leadership, and we will, consistent with our internal succession plan, immediately kick off a search with a leading national executive search firm to identify our next CFO. I'm confident in the long-term opportunity of Portillo's, and I look forward to sharing more as our strategy continues to take shape and drive sustained long-term shareholder value. And Michelle, I want to thank you for your dedicated service and partnership and wish you all the best in your next chapter. I will now turn it over to you to walk through our quarter 1 results in more detail. Michelle Hook: Thanks, Brett. I appreciate the kind words. I believe in the Portillo's brand and its leadership team, and I'll be cheering you all on from the sidelines. Moving on to the company's first quarter performance. During the first quarter, revenues were $182.6 million, reflecting an increase of $6.2 million or 3.5% versus last year. Revenue growth was driven by non-comp restaurants, which contributed $7.7 million of the year-over-year increase. Same-restaurant sales declined 0.1%, decreasing revenues approximately $0.2 million. The same-restaurant sales decline reflected a 0.9% decrease in average check, partially offset by a 0.8% increase in transactions. Lower average check was driven by an approximate 1% decrease in product mix, partially offset by a 0.1% increase in menu prices, reflecting increased promotional offers. When assessing our gross pricing, we came into the first quarter with around 3% of incremental pricing from prior pricing actions in 2025. We had approximately 1.5% roll off in January, approximately 1% roll off in April and the remaining 0.7% to lapse in June. We did not take additional pricing actions during the first quarter. However, we did take a 2% pricing action in mid-April across select menu categories. We expect surprise and delight offers within Perks to continue to have an impact on pricing. In addition to the impact on our net effective pricing in the quarter, our promotional offers and other menu initiatives drove positive transactions. During the quarter, our transactions benefited from our limited time BIG Burger Bundle meal and innovation, including our new birthday cake LTO and the launch of our new sauces. This is in addition to other targeted offers we ran during the quarter on our Portillo's Perks loyalty platform. During April, we have seen negative comp trends of roughly 1 point, driven primarily by negative transaction and mix trends as we are lapping the benefit of our breakfast pilot from the prior year. We expect to have continued headwinds in May as we will be lapping our BOGO Beef promotion from the prior year. As Brett discussed, we will focus on three foundational areas, which we believe will lead to improved sales and transactions and restaurant level profitability for the long term. Turning to costs. Food, beverage and packaging costs increased to 34.7% of revenues in the quarter from 34.6% last year. This increase was driven primarily by higher commodity costs of 1.8%, led by beef and produce, partially offset by an increase in certain menu prices, net of promotional offers. Labor expense increased to 26.9% of revenues from 26.6% in the prior year, primarily due to deleverage from our new restaurant openings, higher benefit costs and wage inflation, partially offset by labor efficiencies. Hourly wage rates increased approximately 1.5% in the quarter compared to prior year. Other operating expenses increased $2.3 million or 10.7%, primarily driven by the opening of new restaurants and higher repairs and maintenance expenses. As a percentage of revenues, other operating expenses increased to 13.2% from 12.4%. Occupancy expenses increased $1.2 million or 11.6%, also driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.4% compared to the prior year, driven by higher occupancy costs and revenue deleverage at new restaurants. Restaurant level adjusted EBITDA decreased $1.8 million to $34.8 million, with margins declining approximately 170 basis points to 19.1% in the quarter versus 20.8% in the prior year. General and administrative expenses increased by $1.5 million to $20.4 million or 11.1% of revenue in the quarter from $18.9 million or 10.7%. This increase was primarily driven by higher equity-based compensation and professional fees, including $0.5 million of dead site costs. As we refine our development strategy, we will continue to evaluate our pipeline. Preopening expenses were $2.6 million in the quarter compared to $0.5 million last year, reflecting the timing and scale of activities related to our planned restaurant openings, including expansion into new markets. Adjusted EBITDA decreased by $2.8 million to $18.5 million or 10.1% of revenue from $21.2 million or 12% of revenue in the prior year. Below the EBITDA line, interest expense was $5.6 million in the quarter, down slightly from last year, driven by a lower effective interest rate. Income tax benefit was $0.2 million in the quarter compared to expense of $1.4 million in the prior year. Our effective tax rate for the quarter was 24.4% versus 25.4% in the prior year, reflecting changes in our valuation allowance related to equity-based compensation expense. Since the end of the quarter, we have opened one additional restaurant in Frisco, Texas and expect to open three additional locations during the remainder of 2026, including our first airport location at DFW International Airport and our second in-line location, which will be in downtown Chicago. Cash provided by operating activities increased 85.8% year-over-year to $17.6 million year-to-date. We ended the quarter with $24 million in cash. We had $104 million outstanding on our revolver, total net debt of $347 million and approximately $42 million of remaining revolver capacity. Thanks for your time today. Operator, please open the line for questions. Operator: [Operator Instructions] And our first question will come from Margaret-May Binshtok with Wolfe Research. Margaret-May Binshtok: Michelle, best of luck, for all the collaboration. I just wanted to ask on the first quarter comp. Can you give us a sense of how that progressed through the quarter? I know January had some weather, but did you guys see February and March showing sequential improvement? And then just ex that breakfast lap that you mentioned in April, how are underlying transactions trending in April? Michelle Hook: Yes, Margaret-May, I'll take that. Yes, you're absolutely right. We were not immune to the weather conditions that hit in January. So we definitely saw that negativity come into play in January. And then obviously, as the quarter progressed, we saw improvement. And I talked about and Brett talked about some of the things that we did in Q1 that helped to contribute to the results that you saw in the quarter. So yes, we did see some improvement in the quarter. And then when we look at April, we're seeing negative trends that's primarily coming in the form of transactions. We do continue to see some negative trends in mix as well. And that's primarily driven by what I describe as more trade downs versus items on the ticket. So those are the trends that we're seeing throughout the month of April. Operator: And our next question will come from Gregory Francfort with Guggenheim. Gregory Francfort: Just maybe the other OpEx line, can you maybe parse out that looks up quite a bit. Is that utilities? Is that maybe delivery fees or something like that? I'm just curious what might have been driving that? Michelle Hook: Yes, Greg, we did see some impacts earlier in the quarter from the weather. So we saw some higher utilities, some higher, what I describe as snow maintenance and removal expenses that drove some variability in the repairs and maintenance line. But those are the specifics that we saw. Again, I'd call some of that more attributable to the weather conditions that we saw, but that's the call out I'd make on that. Gregory Francfort: Got it. And then just with maybe pricing in the quarter, I mean, clearly, Perks is having a big negative impact, but that might be part of just what you're trying to do strategically. Can you maybe parse through like -- do you expect it to have -- I guess you would expect it to have an impact on consumer value perceptions. Is there an expected delay in terms of kind of having more controlled pricing and when the consumer might pick up on that and that impacts traffic on a 6-month delay or a 12-month delay? Any thoughts on that would be great. Michelle Hook: Yes, Greg. So we had two things that impacted that net pricing in the quarter. So we had our BIG Burger Bundle meal. That was the burger, fries and a drink meal we were running for $9.99. That definitely impacted the net pricing as well as the Perks offers that we were running in the quarter as well. And so I would say just from a consumer perspective, you're right. As people go into these offers, whether it's the BIG Burger Bundle that we are running or Perks offers, there's definitely a lag in terms of that value perception. But we continue to focus on those value perception scores. But -- as Brett and the team look towards our strategies in the future, I think what plays a role in that could be many things, whether it's continuing to look at value in the form of Perks offers or menu offerings. We're currently running our new Hot & Saucy beef promotion right now, not really a discount, but more of an LTO. So -- but there is a lag to your point that I think as people go into those that they come out with. And the goal is to obviously drive frequency of visits and attract new guests into our brand. And so those were the things that we were looking at post promotion as well to determine if there was success or not. Brett Patterson: Greg, this is Brett. I would also just chime in that, as Mel mentioned, Michelle mentioned, we're looking at the numerator of the value equation as well. And if you think about our strategy when we're starting with ops excellence, one of the things we need to do is make sure that we're delivering or exceeding the expectations of the folks coming in that are paying full price. I think the second lever that we'll explore as part of the strategy is going to be the use of food innovation to create value. So not just locking in on a fully discounted value offer, but how do we use innovation to talk about value, how do we use marketing to talk more about value. We certainly know it's a driver for the business and kind of where the consumer is at today is important, but not locking ourselves into just going after kind of this discounted promotional model. Operator: [Operator Instructions] We'll go next to Sara Senatore with Bank of America. Sara Senatore: And sorry, just a quick clarification and then a question about the real estate strategy. So for 2Q, I was trying to follow some of the rolling off of prices. Did you say what the effective price will be in the second quarter? Is it -- could it be negative? Michelle Hook: Sarah, so we don't anticipate it being negative. We're not -- the BIG Burger Bundle came off being an offer we were running at the end of Q1. Yes, we're running some various Perks offers as well. But no, we don't expect it to be negative. So just to clarify, we took 2 percentage points of a pricing increase at the beginning of April. We had a point that rolled off midway through April. And then we have around 0.7% that will be in effect until June. So think of it as we sit here today, you had a little bit higher pricing in April, but then the point -- just under 4% in April, and then you had that point that rolled off. So as we sit here in May, we're just under 3%. Sara Senatore: Okay. I appreciate that. And then I guess you mentioned, I guess, $0.5 million of dead site costs. So it sounds like you're already making some changes to the sites in terms of what you might have identified before versus where you're deciding to build. I know the Chief Development Officer, just -- she's relatively, I guess, recent. But anything you can sort of address in terms of what changes maybe your -- or what sites you might be abandoning versus how you're thinking about going forward? Brett Patterson: Sarah, this is Brett. Yes, I'll take that. As far as -- yes, Jennifer is fairly new, but she's hit the ground running. I think the team and Jennifer have been really focused on kind of just reassessing the entire development strategy. The 2026 sites were locked, and those will be finished after we open the next 3 this year. We did have an opportunity for some of the 2027 class to take a look at where there are some sites we could potentially get out of. I don't want to share specifically what those were, but we have made some decisions to get out of a couple of them. So I would say in 2027, and we're probably going to be in somewhere in the 4 to 6 range for openings, and that's why you'll see some dead site costs coming into last quarter and potentially quarter two as well. Operator: And we'll go next to J.P. Wollam with ROTH Capital Partners. John-Paul Wollam: I was hoping we could just maybe talk in terms of productivity in the new Texas stores. Understanding, Brett, to your point, a lot of those sites were kind of already baked, we could say. But just in terms of the openings, how are you thinking about productivity efficiency in terms of labor and back of house? And just any other new takeaways from this year's Texas openings? Brett Patterson: Yes, JP, thank you. I would tell you that the team has done a really good job coming out of 2025 in the first quarter, addressing some of those productivity opportunities. Tony, our Chief Operating Officer, has been very involved with the kind of the Texas turnaround. So I'd say we've seen some improvement, sequential improvement in backhouse labor productivity. There's still opportunity. I think we've got to really take a look at kind of the analogs of similar volumes outside of Texas and how those perform and use that as kind of a benchmark for our Texas teams. And I know Tony and the team are starting to do that work now. So I still think there's opportunities there. Certainly, we've got to drive the top line, and that's more of our focus. We don't want to cut ourselves to the point we can't grow top line. So Denise is they're still working very actively on a very integrated marketing plan for Texas. But yes, we'll continue to see some productivity improvements in Texas as well as some top line growth. Operator: Moving on to Chris O'Cull with Stifel. Christopher O'Cull: Michelle wish you well and hope to work with you again. Michelle Hook: Yes, sure. Christopher O'Cull: Maybe I don't know if this question is for Michelle or Brett, but can you explain the sharp decline in annualized AUVs for the 2025 class during the quarter relative to the fourth quarter? Michelle Hook: Yes. So when you look at the class of '25, Chris, so we had openings that were in the back half of the year. One of those openings was a restaurant we were very public about, which was our first in Atlanta in Kennesaw. And so I think we talked about that having a very robust opening when we opened Kennesaw in November. Obviously, you know us, you know there's a honeymoon curve, right, to the performance of those restaurants. So as those volumes start to settle down, specifically for that restaurant, you see some impacts coming in there. So that's part of what you're seeing in some of that. I'd call out that one specifically. Christopher O'Cull: Brett, why isn't -- why don't you think customer retention isn't higher once you get these strong responses to the initial opening? Do you have any assessment of that? Brett Patterson: I think it's a really good question, Chris. I think there's a real opportunity for us to learn more about kind of the consumer base when we go into these new markets. Certainly, you do see a pretty steep honeymoon. It's a little more steep than I'm used to in my past. I don't know how much that has to do with our ability to drive quick awareness out of the gate, and that kind of wanes off over time. So I would tell you, I don't have the answer now, but it is certainly something we need to continue to explore to better understand that and how do we prop it up during that kind of down cycle in the honeymoon. I would tell you, the one thing I would add is you generally see though very high metrics still from a customer satisfaction, Net Promoter Score. So there's nothing that jumps off that says you didn't open it well and now you've disappointed a lot of guests. They seem very, very engaged and connected to the brand. So again, that frequency is going to be something we really have to understand. Operator: And our next question comes from Sharon Zackfia with William Blair. Sharon Zackfia: Sorry to see Michelle go. It's been a pleasure working with you. I did want to ask about kind of menu innovation versus Perks. It seems like you're having more success with Perks driving traffic. And I'm curious if there's anything there that you could call out specifically that worked well in the first quarter that you plan to replicate or evolve? And then secondarily, as we think about those non-Chicago markets, how is innovation resonating in those markets? Brett Patterson: Yes. I'll speak to the Perks piece. The one thing we have seen is continued growth and penetration. So we -- in quarter one, we saw 3% more penetration from Perks than quarter four. I think the real unlock there is for us to continue to better understand our customer cohorts and how do we tailor messages specific to those cohorts based on their visit frequency. And I know Denise and the team are really -- there's a lot of test and learn going on for that right now. We did see some -- what we've seen when we do Perks offers around kind of special events or holidays, we do get a really strong reaction like opening Major League Baseball Day with buy one hot dog get one free. And so we've seen those really work well for us, but it's not something that we see as kind of this on everyday type scenario. We had -- the BIG Burger Bundle was a big driver in quarter one as well for the traffic. So I think it was a combination of both. And so the -- your question on the innovation, I think there's really an opportunity to learn. I wouldn't say we've had significant meaningful innovation yet when we've really introduced new items or new item format. And I do believe once we get out of Chicago and have different understanding in different markets of what those items can be, I think it will play an important role in the future for us. Operator: Moving next to David Tarantino with Baird. David Tarantino: Brett, I'd be interested to hear more about your vision for how Portillo's should grow over time. I know you have a lot of foundational work that you outlined that you need to complete, but once that work is done, what are you going to be looking for to make the decision on reaccelerating the growth? And what type of growth do you think Portillo's can deliver longer term if you get it right? Brett Patterson: Yes, David, speaking to the development piece, I would tell you, right now, we're turning over every stone to understand every piece of development and what we can learn from the past and then creating certainly a better future for development. So what I'll share again without having the facts, as you mentioned, we've got a lot of research doing insights. But I will tell you, there's an opportunity. Certainly, number one, we've got to make sure we have the real estate forecast model dialed in because that really informs site selection. I think there's an opportunity -- when we go to new markets with low awareness, the type of site we choose is imperative that it's a site that generates high awareness versus they have to find you. There's prototype work we're going to do. We're going to explore what are the best formats that can generate the best returns to the restaurant and still execute high volume. I know Michelle really led the project with the team to get to the 2.0. We're excited to see that come to life. So I would tell you that everything is under review, including build cost. And we'll come back to you at a later date with what we think that means for the future, but we're going to try to get to it really be 2028 before we start to see that work. And again, I think getting the brand study, and I mentioned the discipline in the script, right, having the discipline just to wait for the insights and the research to help guide us, not be necessarily just the guide is going to be really important to our future growth. David Tarantino: And if I'm still on, maybe a follow-up is. Brett Patterson: Sure. David Tarantino: I think at one point, I guess, in the recent past, Portillo's was targeting double-digit unit growth. I mean I guess my question is whether you think that's an appropriate growth rate for the company longer term. Presuming you get all the foundational elements right, I mean, is that, should we be expecting a path back to that level? Or do you think that maybe a slower growth rate is more appropriate? I guess what are your initial thoughts about that or the… Brett Patterson: Yes. Again, I'm anxious to answer that question myself. And I think we've got to -- right now, we've got to do the work, right, to build what I would tell you is what we've done in the past, I wouldn't say is a sustainable double-digit growth model. But developing something for the future that we feel really confident about the level of capital we're spending, the returns we're getting will be the key driver for that. Operator: And moving next to Jim Salera with Stephens. James Salera: To switch gears and talk a little bit on the margin front. I know beef prices have continued to grind higher as the year has progressed and you guys flagged some promotional offering you did that obviously had beef-centric items. Can you just walk us through, a, kind of how you're hedged on beef, but then also b, how you're thinking about maybe some of those promotional mix given that you have beef exposure and where that's at on input cost? Michelle Hook: Yes, Jim, I can take that. So we're still projecting mid-single-digit commodity inflation for the year. And we did have what I'd describe as a lower inflationary number in Q1. And I think that speaks to the things that we put in place to try and manage that exposure. So as we sit here today, we're hedged on our flats or we forward bought on those. There's about 65% of that specific commodity that we're locked in on for the year. And we have about 30%-ish or so of our total basket that we're locked in on for Q2 through Q4. So we've put some things in place to derisk that. And as we look at what is the future of commodities, yes, we still expect beef to be a pressure point for the remainder of this year. We do expect our inflation to be higher than what you saw in Q1 in Q2 through 4. I'd say probably Q4, we're just as we sit here today, expect that to be the most pressured quarter of the future quarters. But we still feel good about, again, that mid-single-digit inflationary number that we put out there. And to your point on marketing certain items that relate to beef, I think to Brett's point, as he continues to refine the strategy and we look at what's best for the brand, I think everything is on the table as we move forward. But Portillo's is built on beef items, whether it's our beef sandwich or hotdogs are all beef, our hamburgers, which we ran that promotion in Q1. And so we're not going to lean away from that, I would say, as we move forward in the future. But I think there's opportunities to lean into other categories as well moving forward. Operator: And moving on to Dennis Geiger with UBS. Dennis Geiger: Michelle, thanks for all your help and best of luck to you, of course. Quick housekeeping item and then a question from me. On the housekeeping, just curious if anything to share on performance across geographies, thinking about Chicagoland versus outside, et cetera, or performance by channel in the quarter? And then the question really is a bit more on the marketing strategy side of things. And just where things stand there, if it's too early to share about anything on sort of notable shifts in marketing strategy or marketing spend levels? Is it still early until some of those survey insights come back? Brett Patterson: Dennis, this is Brett, yes, first, so what we saw in quarter 1, which was really good news, we saw Chicagoland perform really well. They had outsized transaction growth compared to the rest of the fleet. The rest of the concept did well, but it was great to see Chicago pop in the first quarter, which I think speaks to this environment being -- and the way that Chicago uses a brand where you had that value offer BIG Burger Bundle really resonated. So there's learnings for that of how we think about it going forward, but it was nice to see that for Chicago. Your second question regarding marketing, the brand work is going to be critical for that. I know Denise is -- we're working on the MarTech stack. We're looking at channel usage, media mix usage, offers by customer segmentation. So that work is all in progress. But the brand work is really going to help us inform how and who we target once we get that information back. We did plus up some media around the BIG Burger Bundle, and we saw that really support the message. So we know it works when we have the right offer and the right message. But getting the channels and the mix right is going to be really important as we go forward to maximize our marketing spend. Operator: And we'll go next to Matt Curtis with D.A. Davidson. Matthew Curtis: Brett, given your casual dining background, I was just wondering if you could share your thoughts on elevating the customer experience, both in-store and at the drive-thru and if perhaps adding labor might be part of that? Brett Patterson: Matt, I've gotten the question a lot about coming in from full service to fast casual. What I would tell you is I think there's so many similarities. And one was when you just step back and think about what a customer wants, it doesn't really differ between the two channels. And they want great value created by food service atmosphere divided by price. And that's what we have to deliver. So as I think about our brand, how do we make sure our food is compelling. It remains high quality. It's something that the brand has been built on. The service aspect, we're different than a lot of other fast casual concepts with our drive-thru where we have people in the drive-thru taking orders and have that face-to-face interaction. So I think those things have been key to Portillo's and will remain key. But I think your point on how do we enhance that to make sure that we put the guest at the center of everything we do is a culture we're going to continue to focus on in this company. So I don't see a difference of being full service or quick service as it relates to how we think about the customer. Operator: And our final question will come from Brian Harbour with Morgan Stanley. Brian Harbour: Michelle, best of luck, certainly. The conversation about kind of value perception lagging, I guess, is what you're saying that, look, some of these promotional offers have certainly worked, but they're fairly short-lived. I mean how do you think those kind of play a role in the future? Or is this kind of like a conversation about maybe some everyday value thing is needed? How should we think about that? Michelle Hook: Yes. Brian, I think that at the end of the day, we're not looking and Brett and the team are not looking for quick like hitters or fixes for this brand. And so I think doing the work around the brand that Denise is doing on the perception study and what do we want to be over the long term, and it comes back to that value equation that Brett just talked about, which is something over price, whether that's your experience, the quality of the food, the accuracy, the speed, all of that over the price that you're paying for that. So I think as this brand moves forward, that's the way that the team is thinking about it is what's the best over the long term for the brand to continue to provide that "value" to the guest. And those things can come in many forms, whether it's through menu innovation, right? And menu innovation can be permanent menu items that can be limited time offers, right? Those things you don't necessarily have to put the brand on sale or do things like that and discount to have that value perception. Brett talked about operational excellence, like getting better operationally. So focusing in on those metrics that matter, whether it's accuracy or speed of service or hospitality, right? Those are things that over the long term, carry brands forward versus how can I get these quick wins in the short term. So that I know is the mindset moving forward for Brett and the team versus what can we do for this quarter. Brett Patterson: Yes. If I could just add, Brian, one thing is I think the way I would frame it is we have to organizationally make sure we build a much stronger foundation of value -- and then I think as you pause in opportunities, there should be a bump in value. But those to me are very short-term transactional. So if you do a heavy discount over a period of time or an offer, you certainly are going to see your value scores elevate during that time. But generally, what happens as soon as you come off that, your value scores revert back to a base. So our job and our focus is going to be how do we get -- how do we strengthen the base value. And when we do those offers, it's just incremental, right, to the consumer. So again -- and right now, until we really understand that we keep coming back to the brand work and research, we're not going to spend a lot of time on figuring out what are those short-term levers until we really understand who our customer is and how do we go to market, and that will shape our marketing and go to our strategy. Operator: And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Hello, and welcome to the Expro Q1 2026 Earnings Call. My name is Alex, and I'll be coordinating today's call. [Operator Instructions] I'll now hand it over to Dave Wilson, Vice President of Investor Relations. Please go ahead. Dave Wilson: Thank you, operator. Good morning, everyone, and welcome to Expro's First Quarter 2026 Earnings Call. I'm joined today by Mike Jardon, CEO; and Sergio Maiworm, CFO. Both Mike and Sergio will have some prepared remarks, after which we'll open the call for questions. In association with today's call, we have an accompanying presentation and supplemental financial information on our first quarter results. Both of these are posted on the Expro website, expro.com, under the Investors section. Before we begin today's call, I'll remind everyone that some of today's comments may refer to or contain forward-looking statements. Such statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These statements speak only as of today's date, and the company assumes no responsibility to update such forward-looking statements. The company has included in its SEC filings, cautionary language identifying important risk factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the company's SEC filings, which can be obtained on the SEC's website, sec.gov, or on our website, again, expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measures in our first quarter 2026 earnings release, which was issued this morning and can also be found on our website. With that said, I'll turn the call over to Mike. Michael Jardon: Thanks, Dave. Good morning, good afternoon, everyone, and welcome to Expro's first quarter 2026 earnings call. I'll begin by reviewing the first quarter of 2026 financial results from today's press release. I'll then comment on the overall macro environment, provide some insight into our Middle East and North Africa region, talk a bit about our exciting news today with our Enhanced Drilling acquisition announcement, then revisit our outlook for the year ahead. And finally, I will then conclude with some operational highlights for the quarter. Sergio will then provide some further details on our financial performance by geographic region and address the company's ongoing capital allocation framework. Let's begin on Slide 3. During the quarter, the company experienced the usual first quarter seasonality we have in our business. And as a reminder, this seasonality is a result of winter weather in the Northern Hemisphere, which slows offshore activity due to ongoing winter storms and rougher than normal season. Additionally, the seasonal dip is also a result of our customers' CapEx and operational spend cycle that tend to be lower at the start of their annual budget cycles. This is generally more typical with our NOC customers. Additionally, our first quarter results were only marginally impacted by the conflict in the Middle East. I'm pleased to report that local emergency response plans were implemented quickly and the efficiency in which these actions were taken, and that all of our employees still in the region remain safe. I will go into more detail regarding our MENA region in a moment. But from an overall perspective, the disruptions to our Middle East business late in the quarter only had a minor impact on our operational and financial results during the quarter. For the quarter, the company generated $368 million of revenue and $63 million of adjusted EBITDA, representing a 17% margin. Adjusted free cash flow for the quarter was $3 million and was affected by changes in working capital, which Sergio will comment more on later in the call. Now taking an assessment of the current environment, we, like others, see a global energy market that is increasingly influenced by the heightened geopolitical tensions, commodity price volatility and an expanding focus on long-term energy security. At some point, the uncertainties will subside with the expectations that oil prices will reset and begin to stabilize once these disruptions ease. However, there is still a significant amount of disruption that will continue to have global implications in terms of not only near-term supply and demand dynamics, but also over the medium- and longer-term as countries and companies around the world look to prioritize energy security and what will be needed to achieve that. There has been intensified interest in strengthening supply resilience and geographic diversification, trends that could develop and will likely shape industry behavior longer-term. It is our fundamental view that the new normal will look different than it did before the Middle East conflict. Many believe it will still take some time before the industry returns to a more normalized state of operations, and we believe that it will be the end of the second quarter before we have a sense of complete clarity. We remain optimistic that resolution of the situation could begin sooner than that, but we'll adapt our operations appropriately. One industry behavior that we are confident with that we do not believe will change is that of capital discipline. In this light, we see offshore and deepwater developments remaining attractive, not only by providing stable, lower-risk growth pathways, but also from an energy security standpoint as well. We expect such projects will continue to drive demand for Expro's well construction and well management businesses. Additionally, brownfield optimization continues to see a growing focus as operators look to enhance production from existing assets to reduce capital risk. We believe this industry trend also presents an opportunity for Expro's technologies and services as well. We still expect activity to strengthen in the second half of the year, and with Expro's strong offshore and international positioning, along with its production optimization capabilities, believe the company is well positioned to manage near-term uncertainty and benefit from increased activity in the coming quarters and years. To summarize, Expro maintains a constructive outlook for 2026 and beyond, allowing us to continue supporting customers throughout the full life cycle of their assets. Moving to Slide 4, which reflects our MENA region. Oftentimes, when the MENA region is discussed, the focus is heavily on the Middle East portion, which is certainly understandable, and we have received our fair share of questions related to our exposure to countries in that region. Having lived and worked in that part of the world earlier in my career, I think it's helpful to give our stakeholders some more clarity on how Expro is exposed in the region. I'll look to address that really in 3 fundamental ways. First, for Expro, there's more of a balance between our Middle East and North Africa operations in terms of financial contribution, and there has been no disruption to our operations in North Africa. Second, to the countries in the Middle East, while we do have some exposure to countries like Qatar, Kuwait and Iraq, they do not carry as large of a contribution to our revenue or EBITDA generation. The biggest contributor in those regards is Saudi Arabia and to a lesser extent, the Emirates. And while there were some interruptions in those countries' operations, we have continued to have more normal operational cadence. Third, given the timing of the commencement of the conflict in the Middle East, there was only 1 month affected during the first quarter, so that too lessen the overall impact. Now moving to Slide 5. We're very excited to announce Expro's acquisition of Enhanced Drilling. Enhanced Drilling is an industry and technological leader in managed pressure drilling, or MPD, really focused in the deepwater offshore operations. For Expro, this acquisition adds a critical technology solution that is proven and is increasingly gaining traction within the industry. As structured, this acquisition will be immediately accretive to cash flows and EBITDA margins, and it adds over $275 million of order backlog. We see a lot of growth opportunities in the service line going forward, especially as part of the Expro platform. Due to our size and breadth, we are able to bring services and technologies acquired into new markets around the world. We have a proven track record of doing this with our most recent example of Coretrax acquisition that we completed back in 2024. Currently, Enhanced Drilling is operating primarily in offshore Norway and in the Gulf of America. And we see opportunities in the Caribbean, West Africa, Brazil and Australia, where this technology could benefit customers tremendously. Turning to Slide 6. Here's a quick summary of the transaction from a financial perspective. The purchase price is NOK 2 billion, which is currently equating to roughly USD 215 million. We expect some final adjustments to the purchase price based upon customary and working capital adjustments as the transaction is finalized and closed. Expro will utilize a combination of cash on hand and borrowings under the revolving credit facility to fund the acquisition. Current projections are for Enhanced Drilling to add more than $50 million to our annual run rate adjusted EBITDA. Additionally, with adjusted EBITDA margins over 30%, this acquisition will contribute to further EBITDA margin expansion. Finally, we anticipate that the transaction will close in the third quarter and based upon our understanding at this point, will likely be some time in the early part of the quarter. The next few slides provide a little bit more detail on Enhanced Drilling and some of its services and offerings along its riser-based and riserless solutions. We have provided these slides for informational purposes. Now let's jump ahead to Slide #10. On Slide 10, we're providing our 2026 financial guidance based upon what we currently see in the global market. In essence, this means no change to our previously established annual guidance for 2026. With the continued global conflicts, uncertainty still exists, which adds to the complexity of providing forward guidance. That said, however, we believe that current industry optimism is tangible, particularly towards the back end of 2026 and especially as we go into 2027 and beyond. We remain constructive and confident in our second half of 2026, and the associated ramp in revenue and adjusted EBITDA, seeing sequential improvements in each subsequent quarter. With regards to the impact of the Middle East conflict on our future results, assuming a resolution to the Middle East conflict by the end of the second quarter, we would expect the impact on our second quarter results to be in the $10 million to $15 million revenue range. Including the first quarter and projected second quarter, impact of the Middle East conflict would equate to approximately 1% of total company revenues for the year. It is also worth noting for the second quarter, those revenue impacts carry elevated decrementals for EBITDA calculations. In other words, the impacts are disproportionate on the revenue versus the costs. Regarding our confidence and the ramp-up for the back half of the year, there are a few aspects I'd like to highlight. We see opportunities in our North and Latin America region with subsea well access and well flow management projects in the Gulf of America, tubular sales and well intervention and integrity work in Colombia, all of which should contribute a healthy amount to the projected increases. In our Middle East and North Africa region, besides assuming a resolution in the Middle East by the end of the second quarter and a return to more normalized activity, we still expect increasing contributions from our North Africa operations, particularly around a sizable production solutions project. For the back half of the year, in our Asia Pacific region, we see our well construction and well management businesses in Southeast Asia contributing incrementally more, along with some subsea equipment sales in China. Additionally, we expect incremental contributions from our Coretrax product line across our geographic regions. In Europe and Sub-Saharan Africa, while we do not expect much incremental growth in the back half of the year, we still expect operations there to be steady and be a sizable contributor to overall revenue and EBITDA. Finally, as we have mentioned before, we intend to expand our margins this year with the full year benefiting from our Drive 25 initiative and to improve our capital efficiency and wallet share with existing customers. Before moving on to our customer and technology highlights, I want to revisit a few attributes that we believe set Expro apart. These are included on Slide #11. Due to our breadth of services and technologies across the well lifecycle, we see opportunities to expand our wallet share with existing customers. Expro can leverage our installed base to provide additional services and technologies to customers, which adds value to their operations, while at the same time, helping to expand our underlying margins. Another thing that we see as distinct is our innovation and technology offerings. They are emblematic of how we see the industry evolving. Our technologies and our ability to address unique customer challenges place Expro as the vendor of choice for many of our customers and adds to the company's relevancy and longevity with those same customers. In addition to our service and technology breadth, we also have geographic breadth. Our global footprint enables us to leverage services and technologies, whether those are developed internally or acquired through M&A to be deployed in multi geographies where we operate. For example, as we've mentioned before, our acquisition of Coretrax in 2024. That business was operating in circa 15 countries at the time of the acquisition, but now we are deploying those technologies across over 31 countries. We plan to use a similar blueprint with the Enhanced Drilling acquisition, both in terms of integration, but also in terms of market expansion. Now moving on to our customer technology highlights for the quarter on Slide #12. During the first quarter, Expro continued to demonstrate its innovative technological capabilities with additional deployments and introduction of new technologies into the market. Similar to last quarter, we had several examples to choose from, but only a few to quickly highlight. In Norway, Expro successfully delivered a world-first fully remote completion joint makeup with a downhole control line and clamp without a single person in the red zone. The combination of these disruptive technologies enhances safety, increases execution and operational efficiency, and delivers consistent and repeatable outcomes. Another achievement during the quarter was Expro's iTONG offering, reaching a significant industry milestone. We have now successfully run and pulled over 1.2 million feet of casing and tubing in field operations since the technology was first deployed. This achievement underscores the iTONG growing momentum in the market with an increasing number of clients adopting the technology and experiencing its operational safety and performance advantages. Also during the first quarter, we launched Solus, a single shear-and-seal valve that replaces conventional 2-valve subsea well access systems. This technology reduces the complexity, operational risk, time and cost during subsea intervention and decommissioning operations. The last example I want to highlight is the successful deployment of our MultiTrace gas tracing technology for a customer that enabled accurate flow measurement on a large diameter flare system. This technology overcomes significant process challenges caused by the highly transient conditions surrounding the flow of gas and fluctuating gas consumption. MultiTrace allows accurate measurement of the flare gas in complex conditions, helping operators understand emissions and improve compliance without disrupting operations. At the heart of all these innovation examples and a common thread with all of them was the value creation for our customers. Before turning the call over to Sergio, I'd like to briefly revisit Expro's long-term strategic pillars, those we focus on to drive value for our shareholders. These are included on Slide #13. Expro's long-term strategy is to build a large diversified company that has increasing relevancy to our stakeholders, particularly our customers and our shareholders. Our relevancy to customers is built upon our service offering, including our innovative technologies, execution capabilities and market leadership positions. For shareholders, we continue to move forward, building a company that is able to generate healthy levels of free cash flow, which will be used to achieve our various capital allocation goals, all of which Sergio will expand on in his following comments. One of the pillars of the strategy that we have talked a lot about is our commitment to improve the company's financial profile. We have seen evidence of this over the last several years with EBITDA margin expansion and increasing free cash flow generation. These will remain in focus moving forward, and we expect to achieve further improvement through cost efficiencies and reducing our capital intensity. Another pillar and an important component of our strategy is our technology and innovation and how those are deployed into the market. We continue to develop and deploy new technologies into the market across our global footprint. Our expansive footprint also enables us to internationalize or globalize technologies, particularly those that we acquire through acquisitions that have limited geographic exposure, which leads to another component of our strategy, and that is to grow the company through scalable acquisitions like today's Enhanced Drilling announcement. The company has a strong track record of execution with acquisitions that we have made over the last several years. For these acquisitions and potential ones in the future, Expro looks to add to its services and technology offerings. In general, we seek opportunities with international and offshore exposure that have adjacent product offerings and are accretive to the company's financial position, again, very characteristic of today's announcement of Enhanced Drilling. Due to the slate of service offerings across the full well lifecycle, we have multiple avenues to pursue when looking at potential acquisitions. Our focus will continue to be on pursuing those that we believe will increase relevancy with our customers and shareholders. With that, I'll turn the call over to Sergio, to review our first quarter results in detail. Sergio Maiworm: Thank you, Mike, and good morning to everyone on the call. As we reiterated on our last call, Expro's quarterly results reflect the normal seasonality we experienced during the first quarter of the calendar year, caused primarily by -- as Mike mentioned -- the winter weather in the Northern Hemisphere and a slow start to customer spending. Again, this is normal seasonality and expected every year during the first quarter. With this backdrop, the company executed well on its operational and financial results. Both revenue and adjusted EBITDA reflected the relative midpoints of the ranges we previously provided. Specifically to Q1, our adjusted EBITDA was $63 million with a margin of 17.1%, which is a decline from the previous quarter, but again, reflects the seasonality of the first quarter, and we expect sequential improvement for the remaining quarters of the year. Slide 14 illustrates our annual margin growth for the past few years. Even with these results and noting the ongoing situation in the Middle East and the modest headwinds those have created for us, we remain focused on expanding our margins in 2026, and the drivers of margin expansion for us remain the same. In the near term, those are reflected on Slide 15, and they are the full year impact of our Drive 25 cost efficiency initiative, increasing customer wallet share at higher margins and to continue to internationalize services and technologies acquired in previous acquisitions, spreading those into new geographic areas. The Enhanced Drilling acquisition we announced today will further help expand our margins. Not only is the margin in that business already greater than 30%, but the internationalization of that technology will expand our margins even further. In the medium term, we expect to increase our top line revenue, continue to gain customer wallet share and more fully utilize services and technologies acquired across our geographic areas in order to achieve the next milestone goal of adjusted EBITDA margins greater than 25%. Also acknowledging that possible future M&A may play a factor as well, which we have executed on with today's announcement regarding the Enhanced Drilling acquisition. We're also keenly focused on cash flow generation. And in Q1, Expro reported quarterly free cash flow generation of $3 million on an adjusted basis. This was admittedly light based on our own expectations, but was really driven by working capital changes that worked against us this quarter. Those changes were roughly $20 million more than what we had expected and was primarily driven by the increase in our accounts receivable balance and prepaid amounts included in our other asset balances. This phenomenon is just timing-related. And in fact, subsequent to the quarter end, we have already seen most of Q1 related collections being received, and we already experienced a significant improvement in our working capital balances. I personally expect the second quarter to be a very good collections quarter. Considering the already seen improvements in our working capital, our operational outlook and anticipated CapEx for the year, we still believe we'll generate a good level of adjusted free cash flow this year, in line with our annual guidance. Now quickly turning to the liquidity position. We have included this on Slide 16. The company closed the quarter with $517 million in total liquidity. That includes $171 million in cash on the balance sheet. At quarter end, we had $79 million outstanding on our revolving credit facility, which was consistent from the previous quarter and put the company's net cash position at approximately $92 million. Now obviously, with the Enhanced Drilling acquisition, those numbers will change as we are funding the acquisition through a combination of cash on hand and borrowings under the credit facility. At the end of the day, we're still in a very strong financial position with substantially less than 1x net debt to adjusted EBITDA. Having and maintaining a strong balance sheet positions the company well to execute on its other capital allocation priorities. These are highlighted again on Slide 17. Our capital allocation framework is designed to maximize long-term value creation. As we have mentioned before, there are 4 equally important capital deployment priorities: invest in the business with CapEx, providing organic growth that enhances our core capabilities, improves efficiencies and/or supports technological innovation across our service offerings. As a reminder, the vast majority of our capital expenditures are geared towards specific projects with known return profiles that meet or exceed our standards. I would reiterate, these are not speculative investments. Another capital allocation priority is to deploy capital to inorganic growth. Just like today's announcement, through M&A, Expro can and has completed acquisitions that add to the company's complement of services across the well lifecycle. Our M&A strategy is focused on opportunities that offer clear industrial logic, scalable technologies and synergies and the potential to expand our presence in attractive markets. We maintain a highly selective approach when looking at M&A to ensure only the value-accretive opportunities are pursued and pursued at the right price. Another key aspect of our capital allocation framework is a commitment to return cash to shareholders. As we have already stated, during the first quarter, we repurchased approximately 1.2 million shares for roughly $20 million. This puts us on a really good path to meet or exceed our current year target of returning at least 1/3 of free cash flow to shareholders. On the final leg of the stool in terms of capital allocation is something that I have already covered, and that is maintaining a strong balance sheet. In doing so, we have the financial flexibility and resilience to act on our other capital allocation priorities. For example, even with an unexpected subpar free cash flow generation during the quarter, we were still able to make significant process on our share repurchase target for the year and still maintain the company in a healthy net cash position. This last example also reflects our ability to manage our capital allocation priorities dynamically with one not dominating the ranking. Along those lines, it's important to note that even in a seasonally weak quarter, we were able to execute across all of these capital allocation priorities recently. We invested organically in our business through CapEx. We returned cash to shareholders. We executed on accretive M&A, and we maintained a strong balance sheet. Before turning to our segment performance, I do want to reiterate and summarize our financial outlook for 2026, as Mike previously addressed in Slide 10. Overall, we remain very optimistic with the industry outlook for the second half of 2026 and beyond. Our current projections assume the adverse impacts of the Middle East conflict we seen in the second quarter with no lasting impacts for the third and fourth quarters. And Mike alluded to several real and live opportunities across the regions that we see providing tangible sequential increases in the back half of the year, which when combined with the more favorable working capital changes will result in more significant free cash flow generation. Now I'd like to quickly address our segment performance this quarter. These are covered in Slides 18 through 21 in the accompanying presentation. Turning to regional results. For North and Latin America or NLA, first quarter revenue was $128 million, down just $2 million quarter-over-quarter, reflecting various puts and takes comprised of lower well flow management revenue in Guyana and reduced well construction revenue in the U.S. and Brazil, partially offset by higher subsea well access revenues in the U.S. and increased well flow management revenue in Mexico. Segment EBITDA margin at 20% was down compared to prior quarter at 24%. This decrease was primarily attributable to a less favorable activity mix in the region due to normal seasonality during the quarter. For Europe and Sub-Saharan Africa or ESSA, first quarter revenue was $114 million, also down just $2 million on a sequential basis due to lower well flow management revenues in Angola and Bulgaria and lower subsea well access and well construction revenue in Ghana, partially offset by higher well construction revenue in Ivory Coast. Segment EBITDA margin at 28%, was down sequentially, also reflecting an unfavorable product mix relating to a reduction of higher-margin projects given the normal 1Q seasonality. The Middle East and North Africa region, or MENA, though impacted to some extent by the Middle East conflict that began late in the quarter, still delivered a fairly solid quarter. Revenues of $82 million were down sequentially from the previous quarter of $93 million. The decrease in revenue was primarily driven by lower well flow management revenue in Algeria, Saudi Arabia and Iraq, together with reduced well intervention activity in Qatar due to the ongoing conflicts in the Middle East. MENA segment EBITDA margin was 29% of revenues, decreasing from 39% in the prior quarter. The decrease in the segment EBITDA margin is consistent with the decrease in revenues and change in activity mix experienced during the quarter. Finally, in Asia Pacific or APAC, first quarter revenue was $44 million, a modest increase of $1 million sequentially. Here, the increase was a result of the puts and takes relating to higher subsea well access activity in Malaysia and increased Coretrax-related activity, partially offset by lower well flow management and subsea well access activity in Australia. Asia Pacific segment EBITDA margin at 16% of revenues was consistent with the prior quarter. With that reviewed, I'll turn the call back to Mike for a few closing comments. Michael Jardon: Thanks, Sergio. As we conclude our prepared remarks and before opening the call for questions, I'd like to conclude with the following comments. We share the industry's increased optimism over the medium and long-term, though recognizing it has come at a cost, both from a financial perspective, but also at a human level. I remain confident in the company and that our employees will continue to provide value-added services to our customers, which we intend to translate into value for our shareholders. As part of that, we continue to demonstrate our ability to execute across multiple capital allocation priorities and we'll continue to do so in the future. We thank our employees, customers and shareholders for their continued support and look forward to building on our momentum in the quarters and years ahead. Finally, I look forward to welcoming all the folks at Enhanced Drilling into the Expro family. We are very excited about the opportunities that we can jointly pursue. With that, we can open up the call for questions. Operator: [Operator Instructions] Our first question for today comes from Caitlin Donohue of Goldman Sachs. Caitlin Donohue: Can you walk us through your anticipated growth prospects with the acquisition of Enhanced Drilling, just the strategy of how you anticipate to further expand Expro's wallet share in certain geographies of existing services with the portfolio expansion with MPD? Michael Jardon: No, Caitlin, thank you for the question. And we're -- first off, we are so excited about the Enhanced Drilling acquisition. I mean, this is one we've been looking at and we've been working on for a while, and we've been able to get this closed out here over the last few weeks. And this is -- this really is beyond wallet share expansion for us. This really is a market share expansion opportunity. The technology has tremendous application. It's only in offshore, particularly deepwater, allows operators to drill more complex casing strings and those type of things because it's a dual gradient technology. So the predominant deepwater basins are really where this is going to have application. And as we talked about in the earlier and we've highlighted in the press release, today, it's really -- on the market penetration really has been in Norway and in some here in the U.S. Gulf. So places like Guyana has tremendous application. Brazil, especially with the sub-salt new applications, you start to move into West Africa, the Ghana, the Angola, Australia, I mean, this is a tremendously positive advancement for us that really allows us to expand our service offering into much more of the managed pressure drilling services. So the good thing for us is it's a very similar playbook to how we rolled out the technology from Coretrax. And so our ability, both from an integration standpoint as well as from a market penetration standpoint, we think we'll be able to do that. But I think over the course of the coming few months, we'll be able to get some good penetration into some of those key geographies and in particular, Guyana, to be frank. Caitlin Donohue: Just one more on my end. For the Drive 25 initiatives, bringing down costs over the long-term is a continued goal. Can you give some color on the progress there, particularly as now you have this Enhanced Drilling acquisition, some growth that you might now see from the expanded portfolio? Sergio Maiworm: Caitlin, this is Sergio. I'm happy to address that. So I mean, we are continuing with our cost outs, and we're continuing to make sure that we're getting as efficient as we can as a company. So this is a bit of an ongoing process, the efficiency gains, et cetera. I would say from a Drive 25, we've achieved way more than what we had set out to achieve initially. If you remember, at the beginning, we said that we wanted to take out about $25 million of costs per year. Then we actually increased that to $30 million per year. I think we're close to $40 million now, and a lot of those projects have already been completed. So you should see the full impact of that Drive 25 in our 2026 numbers and beyond. So all of those increased efficiencies, which means that we're taking some of these structural costs out of the system. This is not just we removed a number of people, given the level of activity that we have, but then we will have to bring those costs back into the system if the activity increases. These are sticky cost removals or meaning these are structural cost reductions that will give us a lot of operational leverage as we continue to see the market picking up in the second half of '26 and into '27. That will allow us to grow the top line without actually any meaningful increases in our -- or any increases to be frank, to our support cost structure. So that gives us a lot of incremental torque in the business and cash flow generation with that. Operator: Our next question comes from Eddie Kim with Barclays. Edward Kim: So obviously, the world has changed since your last earnings call. Are you seeing any noticeable change in your customer conversations? And if so, any specific products or business lines where you are seeing or where you expect activity to pick up meaningfully as a result of what's taken place over the past 2 months that's different from your expectations at the very beginning of the year? Michael Jardon: No, Eddie, and thanks for the question. Thanks for joining. I guess so. I was just in Asia here recently. And the Asia market is really -- there was an awful lot of customer conversation and dialogue around more production type projects, more OpEx-related type things, kind of incremental oil. So I think that's -- I think we're going to see that start to strengthen up. But also, quite frankly, both in Asia as well as other customer conversations I've had, there is much more of a situational awareness today around energy security. I think it's going to go well beyond the kind of phenomenon we saw in Europe to begin with, with the Russia-Ukraine conflict. I think there's just a lot more situational awareness around that. So I think that's going to translate into especially some of the deepwater basins, those have got very efficient breakeven costs at this point in time, I think can help add to energy security. And frankly, that means what we're going to see is more drilling and completions type activity. And that's really kind of a sweet spot for us today with our well construction product line, with our subsea product line. And that's one of the reasons that I'm so excited about Enhanced Drilling, because I think you've even heard commentary from the drilling guys here over the course of the last couple of weeks. The second half of 2026, I think if 60 days ago, we thought it was going to be at x level. I think what we see now globally, it's going to be x plus some margin in the second half of the year. I think it's going to kind of step up and ramp up. More drilling activity means more well construction activity means more completion activity. And I think we're really well positioned for that. I think it just sets up 2027 and beyond to be even more robust. Edward Kim: Great. My follow-up is just on the Enhanced Drilling acquisition. Adoption of MPD has picked up a lot over the past several years. Do you have a sense of what the overall market penetration is of MPD globally? Just of the -- I don't know -- 130 deepwater rigs today, how many rigs are utilizing MPD today? And for this Enhanced Drilling acquisition specifically, is it more about market penetration into rigs that don't have MPD currently? Or is it more about replacing incumbents? Michael Jardon: Yes. No, Eddie, it's a really good question. I can say it's part of what we spend an awful lot of time trying to make sure we had a good understanding of as we went into the acquisition. So of those kind of 130-ish floating assets today, there's probably roughly 100 of those have MPD on them today. And with Enhanced Drilling, we've probably got less than a 10% market share today. All 130 of those rigs have an application, have an opportunity for Enhanced Drilling. The difference with this technology is because it's a dual gradient, it allows the operators to drill more complex geology, more complex reservoir pore pressures, also allows them to have different casing designs. They can run larger casing designs to much deeper in the well. So it's going to help them enhance them from a safety, from an operational type standpoint. So we really see of those 130 rigs, you could run this dual gradient technology on all 130 of them, probably not required on all 130 of them, but it's required on an awful lot more than a 10% market share we have today. So long answer, but it's more around displacement of current MPD techniques with this particular technology. Operator: Our next question comes from Keith Beckmann of Pickering Energy Partners. Keith Beckmann: I want to say congrats on the acquisition. Obviously, MPD is not bad to get into if the floater market plays out like we all hope it does. But I wanted to kind of think about the technology side of things, given it's tech day. So I was wondering if maybe given maybe improved 2027 thoughts, maybe how are you thinking about the timing of potentially rolling out technologies? And if you could just kind of talk through how you plan to capture the value and the deployment of those technologies. Michael Jardon: No. Keith, thank you. It's really so much of our innovation focus and our engineering efforts really today is on creating additional operational efficiency. I mean, the things we've done around Drive 25 and really trying to make sure we have sticky cost efficiency, cost-out efforts, we're trying to do the same thing from an operational standpoint. We're trying to reduce the number of personnel that are required. We're trying to make things more autonomous, to make things more repeatable and more -- just more efficient. And so some of the technologies I highlighted earlier around our remote clamp installation system, it really does that, reduces personnel, makes things more efficient. Our iTONG technology allows us to reduce the number of personnel, reduce personnel in the red zone. And we're trying to do the same thing with our well flow management, our well testing operations as well. We're moving to more automation. You're talking about a technology that's been in the industry for 70 years. We've been doing it for 50 plus, and we're actually bringing some efficiency to it. We're reducing the number of personnel that are required, and that brings more efficient operations, but frankly, also helps us with being able to redeploy those personnel to other operations. So it's really kind of that same mantra of efficiency, both from a cost standpoint, but also from an innovation, engineering, technology deployment standpoint as well. Keith Beckmann: Awesome. The second question that I wanted to ask was just around slight Middle East headwinds in 1Q, 2Q. But really, the thing that I wanted to hit on was, how do you expect that you guys could potentially participate in a recovery once the conflict is essentially over? Are there ways that you've identified or you think in particular, you could try to capitalize on potentially in the event that the Middle East needs to start producing a lot more? Michael Jardon: Yes. I mean, it's -- we've had a lot of conversations around the Middle East. Several of us internally have lived and worked in the Middle East earlier in our careers. And I think what we're going to see is we're probably going to observe a different customer and operating dynamic in the Middle East than what we have historically. I think we saw that starting with the Emirates now announcing that they're going to exit from OPEC. They've already been kind of not staying consistent with their production quotas and those kind of things. I think we're going to see much more of a drive for enhanced production and enhanced operations out of the Middle East. So I think that's going to allow us to participate because an awful lot of that is going to be around drilling and completions. And especially on the drilling side for our well construction portfolio, we think that's something we can continue to expand in that marketplace. I just -- philosophically, I mean, right now, our assumptions are that we've come back to kind of more of a normalcy in terms of security and those kind of things in the Middle East here in the second quarter. I think we're going to have to see how that plays out. It seems to be we get one message in the morning and then we get a different message in the afternoon with how things are progressing from a geopolitical standpoint from the Middle East. So we'll continue to be flexible and adaptable with our business and our operations. Short-term, we'll see how that plays out. I do think medium and long-term, the reservoirs are so prolific in the Middle East. They're going to have to play a really strong role in future global production. So I think it will be tremendous in the medium and long-term. We'll just have to kind of see with this choppiness, how that plays out here in the coming weeks and months. And hopefully, we're not talking quarters. Operator: Our next question comes from Josh Jayne of Daniel Energy Partners. Joshua Jayne: You highlighted no logistical issues today as a result of the conflict, but maybe you could just go into a bit more detail on how you're positioning yourself to not be impacted in the event that this goes longer than we all think it may. Michael Jardon: Yes, Josh, thanks for joining us. I think it's -- today, especially for our activity in the Middle East, the vast majority of our revenue and our service intensity comes from services. It doesn't come from product sales. So we're less dependent upon the ability to transport equipment and gear into the region. So in the short-term, it hasn't had a significant effect on us. But frankly, we go beyond weeks and months and we start talking about quarters of conflict, it will become a little bit more of a constraint for us just because we actually have to be able to ship in M&S supplies for maintenance and those type of things. Those tend to be smaller volumes, smaller items that can come in via land, they can come in via air. So right now, we just don't see a significant impact in it. But if this goes on for an extended period of time, and frankly, I personally don't see anything that makes me think that this is going to go on for an extended period of time, we could get to the point where we would have an impact. But today, it's just not because of the makeup of our business and our activity in the Middle East, much more service related, just not having a tremendous influence today. Joshua Jayne: Okay. And then I just wanted to touch on the acquisition one more time. You talked about expanding it geographically as it's obviously relatively well concentrated today. You mentioned Guyana as an opportunity, for example. Maybe just could you go into a bit more detail on how long -- how long it may take once you're fully on board? Do you think it takes to really start to see diversification in the business and just how you're thinking through that a bit more would be great. Michael Jardon: No. I mean, Josh, it's another -- it's a good question. I appreciate you following up. I mean, this is one where the playbook that we've gone through for Coretrax is we've been very intentional on we're going to go to country A first. We're going to go to country B, second. We're going to go to country C, third. We did it in a very specific order because we wanted to maximize the market penetration. We want to maximize the pricing, and we'll go through that same type of process with Enhanced Drilling. The good thing here is, from a technology standpoint, this is so critical and really brings so much value to the operators that it almost sells itself. I think part of the challenge and part of why that management team is so excited to be part of a bigger platform is we've got more channels. We've got more customer engagements. We've got more opportunities to do that. So I think one of our -- and I don't want to call it limitation, but I think one of our throttling mechanisms here is going to be really our ability to -- from a CapEx standpoint to deliver additional incremental systems. We've got a certain number in flight right now, and we'll have to go through and reevaluate which markets we think we can get penetration in. So it's going to be the deepwater basins. We're going to focus on those. It brings efficiency. It brings additional safety. And frankly, I think brings -- could potentially bring an overall cost reduction element to the operators as they can start to change some of their casing designs, I think that brings some tremendous flexibility. So long answer, lots of things to say there, but I think it's part of what you'll really be able to hear from us over the course of the next few months as we start to move that thing forward, get it closed and then being able to really start to action and implement it. You'll hear a lot more about our plans on some of those things. Operator: Our next question comes from Derek Podhaizer of Piper Sandler. Derek Podhaizer: Sorry if I missed this before, I jumped on a little late here, but hoping to get some more color around the 2Q guidance. Just trying to think through it. We obviously, get the seasonal rebound, some margin expansion, but then trying to interplay of the $10 million to $15 million impact from the current Middle East conflict. You said that's going to come with fairly high decrementals, but just also just trying to think of the shape of the recovery as you maintain the full year guide and the big -- the sharp step-up in the second half of the year. So maybe just some help on second quarter would be great. Sergio Maiworm: Derek, this is Sergio. Happy to answer those. So I mean, as we've mentioned before, even before the conflict began and now it's even more so, this is going to be a stair step type of results, right? So second quarter results are going to be higher than first, and third is going to be higher than second and et cetera. So that is the shape of kind of how we should think about kind of revenues and EBITDA and cash flow generation throughout the year. So just kind of just using that as a starting point, as we talked about second quarter will have about $10 million or $15 million impact on our revenue generation in the Middle East because of the conflict. That comes with pretty high decrementals. So you shouldn't assume that there is a pretty significant EBITDA deficiency on that as well. So if you think more about a little bit of the third quarter is a bit of the fulcrum here. So if you think there's so much kind of EBITDA and cash flow that we need to generate throughout the rest of the year and assuming that second quarter is going to be better than first, but not quite as high as the third. So that kind of gives you a little bit of that shape of the recovery there, if that helps you. Derek Podhaizer: It does. Maybe just a bit of a holistic question, just given the Enhanced Drilling acquisition, which was pretty accretive. But just thinking about consolidation in the offshore space, we've seen it on the floater side. We've seen it with support vessels, decommissioning, P&A, obviously, Enhanced Drilling with you guys more through a technology lens. But just given we're entering this what appears like a multiyear up cycle in offshore, what else could we expect from the markets from a consolidation lens to keep up with the demand of these upstream customers that are about to deploy multiyear development projects? Just maybe some thoughts around what you could see when we look out over the next few years from a consolidation standpoint. Michael Jardon: Yes. Derek, it's Mike, and thanks for the question. I think it's -- you're asking the really key important element there. And it's -- for us, we're more relevant today post the Enhanced Drilling acquisition than we were yesterday. We need to continue to become more relevant to our customers. And if we're more relevant to our customers, I know we can be more relevant to investors. I think we need to continue to have consolidation in the market. I think especially offshore, international type areas, I think we need to continue to start to try to see that. We're active in it every day of the week. This is another acquisition. I think some of you heard me refer before that I really like the -- my 7-year-old grandson math. This is another one of those. My 7-year-old grandson can do the math to figure out this one is accretive. So we continue to look for those kind of opportunities. We continue to try to do things that help us be more relevant for our customers. I'm going to be particularly excited to talk to customers about Enhanced Drilling, because I think it's going to be like some of the other acquisitions we've made, it's going to make perfect sense to them why that brand under the Expro umbrella is really going to make a lot of sense. So we continue to be active in it. We continue to -- we're not just trying to become big for bigger sake, but we're trying to become more relevant to our customers. And I think that's where we'll continue to have our efforts. Some of it's going to be technology focused. Some of it's going to be market expansion focused. Some of it's going to be geographic expansion. It's all those kind of things that we continue to really put a lot of emphasis on internally. Operator: At this time, we currently have no further questions. Therefore, that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.
Operator: Greetings. Welcome to Apple Hospitality REIT First Quarter 2026 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Kelly Clarke, Vice President, Investor Relations. Thank you. You may begin. Kelly Clarke: Good morning, and welcome to Apple Hospitality REIT's First Quarter 2026 Earnings Call. Today's call will be based on the earnings release and Form 10-Q, which we distributed and filed yesterday afternoon. Before we begin, please note that today's call may include forward-looking statements as defined by federal securities laws. These forward-looking statements are based on current views and assumptions, and as a result, are subject to numerous risks, uncertainties and the outcome of future events that could cause actual results, performance or achievements to materially differ from those expressed, projected or implied. Any such forward-looking statements are qualified by the risk factors described in our filings with the SEC, including in our 2025 annual report on Form 10-K and speak only as of today. The company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, non-GAAP measures of performance will be discussed during this call. Reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are included in yesterday's earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit applehospitalityreit.com. This morning, Justin Knight, our Chief Executive Officer; and Liz Perkins, our Chief Financial Officer, will provide an overview of our results for the first quarter 2026 and an operational outlook for the remainder of the year. Unless otherwise stated, all changes in performance metrics refer to year-over-year changes for the comparable period. Following the overview, we will open the call for Q&A. At this time, it is my pleasure to turn the call over to Justin. Justin Knight: Good morning, and thank you for joining us today for our first quarter 2026 earnings call. We are pleased to report a strong start to the year with comparable hotels RevPAR growth of more than 2% despite challenging year-over-year comparisons to the first quarter of 2025. Underscoring the strength of the quarter, approximately 2/3 of our hotels delivered RevPAR growth. And on a same-store basis, RevPAR grew nearly 3% with margin expansion. The efficient operating model of our hotels, combined with our prudent management of expenses, enabled us to deliver meaningful flow-through of top line improvements to bottom line performance, resulting in growth across comparable hotels adjusted hotel EBITDA, adjusted EBITDAre and modified funds from operations. Demand momentum has continued into the second quarter. Preliminary reports for the month of April indicate comparable hotels RevPAR growth of over 4%, supported by continued strength in demand and the benefit of favorable year-over-year comparisons related to the negative effects of DOGE, Liberation Day and the resulting general macroeconomic uncertainty. While the ongoing conflict in the Middle East and its effects on global energy markets adds to an uncertain geopolitical and economic backdrop, our broadly diversified rooms-focused portfolio continues to demonstrate demand resilience. Improving occupancy and forward booking trends give us confidence heading into the summer months. Reflecting our year-to-date outperformance, we are raising our full year RevPAR guidance 100 basis points to 1% at the midpoint. The revised range maintains a measured view of the year ahead, and we believe it could ultimately prove conservative. Transient demand has been stronger than anticipated. Early summer performance may benefit from incremental leisure travel tied to the FIFA World Cup, and we are beginning to lap periods negatively affected by reduced government spending, tariff-related disruption and last year's government shutdown. Taken together, these factors represent potential upside not fully reflected in our updated outlook. Disciplined capital allocation has been central to our success over decades in the lodging industry. We prudently balance near- and long-term investment decisions to capitalize on current opportunities while positioning for the future. Over time, this approach is designed to deliver compelling total returns to our shareholders through durable earnings growth and long-term capital appreciation. In April of this year, we completed the sale of our Hampton Inn & Suites in Rochester, Minnesota for approximately $9 million. The sales price represents a 5% cap rate or 14.5x EBITDA multiple before CapEx and a 4% cap rate or 19.6x EBITDA multiple after taking into consideration an estimated $3 million in anticipated capital improvements. We continue to see opportunity to selectively prune our portfolio through transactions that enable us to reinvest proceeds in ways that enhance returns for our shareholders. Recent acquisitions have performed well despite headwinds in several markets. The Embassy Suites in Madison, Wisconsin saw meaningful improvement as the hotel completed its first full year of operations. The AC Hotel in Washington, D.C., also acquired in 2024, produced full year 2025 RevPAR of $205 and a 43% house profit margin, solid results given the meaningful pullback in government travel and weaker convention calendar last year. The Nashville Motto, which recently received Hilton's New Build of the Year Award for the Motto brand, continues to ramp well with average RevPAR approaching $200 over recent weeks. And the Homewood Suites Tampa-Brandon acquired last year continues to produce strong yields in advance of a full renovation and repositioning planned this summer. Turning to out-year commitments. We continue to have forward contracts for 2 projects in early stages of development, an AC in Anchorage, Alaska and a dual brand AC and Residence Inn located adjacent to our SpringHill Suites in Las Vegas. The AC in Anchorage has broken ground and is expected to be delivered in late 2027. Construction has not yet begun on the Las Vegas project. The dual brand AC and Residence Inn are currently expected to be completed in the second quarter of 2028. The current transaction environment does not yet support accretive opportunities relative to our cost of capital, and we do not currently have any agreements for acquisitions in 2026. Consistent with our disciplined approach, we remain actively engaged in the transaction market, evaluating potential hotel acquisitions relative to other uses of capital with a focus on maximizing long-term value for our shareholders. As we have continuously demonstrated over the years, the flexibility of our balance sheet and our reputation for strong execution puts us in a position to act quickly when market conditions shift to be more favorable. We also continue to strategically reinvest in our portfolio, ensuring that our hotels remain competitive within their respective markets and maintain a strong value proposition for our guests. For the full year, we expect to reinvest between $80 million and $90 million, including major renovations planned at 21 hotels. The scale of our portfolio, efficient design of our rooms-focused hotels and our experienced in-house project management team enable us to maintain our assets with average annual CapEx spend of approximately 6% of revenues, significantly lower than full-service portfolios. Combined with stronger operating margins, this efficiency translates into substantial free cash flow from operations, which we use to fund shareholder distributions and strategic investments. For the quarter, capital expenditures totaled approximately $27.5 million. Supported by strong cash flow from our diverse portfolio of hotels, we continue to return capital to shareholders through attractive monthly distributions, which contribute to total returns. During the first quarter, we paid distributions totaling approximately $57 million or $0.24 per common share. Based on Friday's closing stock price, our annualized regular monthly cash distribution of $0.96 per share represents an annual yield of approximately 7.2%. Together with our Board of Directors, we will continue to evaluate these distributions in the context of portfolio performance, capital needs and other accretive opportunities to create long-term shareholder value. Throughout our 26-year history in the lodging industry, we have refined our strategy with intention. We invest in high-quality of hotels that appeal to a broad set of business and leisure customers. We diversify our portfolio across markets and demand generators. We maintain a strong and flexible balance sheet with low leverage. We reinvest strategically in our portfolio, and we work closely with the experienced management teams who operate our hotels. We own one of the largest, most diverse portfolios of upscale rooms-focused hotels in the United States, 216 hotels with almost 30,000 guest rooms diversified across 83 markets in 37 states and the District of Columbia. Travel demand for our portfolio has remained resilient with meaningful growth in recent months, reinforcing the merits of our strategy. We continue to believe that historically low supply growth from new hotel construction in our markets materially reduces the overall risk profile of our portfolio, limits potential downside and enhances potential upside. At quarter end, 57% of our hotels did not have any new upper upscale or upper mid-scale product under construction within a 5-mile radius. We have confidence in the outlook for the hospitality industry and in the strength and positioning of our portfolio. As we look ahead, we will continue to focus on the things within our control, operational execution, disciplined capital allocation and an uncompromising commitment to integrity. Above all, we are committed to creating lasting value for our shareholders. It is now my pleasure to turn the call over to Liz for additional details on our balance sheet, financial performance during the quarter and outlook for the remainder of the year. Liz Perkins: Thank you, Justin, and good morning. The first quarter was a strong start to the year with our portfolio demonstrating the durability of our operating model. We are especially pleased with our performance relative to initial expectations that Q1 would be our weakest quarter in the year. With a strong finish to February and acceleration into March, we ended the quarter with RevPAR growth exceeding the high end of our initial full year guidance range. For the quarter, comparable hotels RevPAR was $115, up 2.2%. ADR was $157, up 0.1% and occupancy was 73%, an increase of 2.1%. Performance improved as we moved through the quarter. In January, comparable hotels RevPAR was down 1.6%, reflecting a challenging comparison to the same period last year, nearly half of which was attributable to wildfire-related recovery business in early 2025. Excluding our California hotels that saw benefit, first quarter RevPAR grew 3%. In February, comparable hotels RevPAR increased by 1.5%, supported by strengthening business and leisure demand despite some weather disruption. March performance was particularly noteworthy with comparable hotels RevPAR growth of 5.8%, well ahead of expectations and indicative of broad-based demand strength across the portfolio, extending beyond the early effects of policy-driven demand headwinds experienced last year. For the quarter, comparable hotels total revenue was up 4.3% to $337 million, supported by continued strength in other revenues, which were up 10%. The efficient operating models in our hotels, combined with disciplined expense management, drove strong flow-through from top line growth to bottom line results. For the quarter, we delivered comparable hotels adjusted hotel EBITDA of $108 million, up 3.6%, and an adjusted hotel EBITDA margin of 32.2%, a reduction of just 20 basis points. Results reflect the ongoing ramp of our recently opened Motto Nashville Downtown and the seasonal impact of Hotel 57, both of which weighed on overall comparable hotels results. On a same-store basis, which excludes the impact of the Motto Nashville Downtown, the transition of Hotel 57 and our recently acquired Homewood Suites Tampa-Brandon, RevPAR grew by 2.8% for the quarter. Same-store total revenue grew 3.1%, supported by continued strength in non-room revenues, which grew 6% in the quarter. Strong top line growth, combined with disciplined cost management, drove same-store adjusted hotel EBITDA growth of 4.2% and 30 basis points of adjusted hotel EBITDA margin expansion. These bottom line results are especially encouraging given the ADR headwinds we faced during the quarter and the disruption and transition expenses associated with converting our Marriott-managed hotels to franchise. As we move into seasonally higher occupancy months, stabilize recently transitioned hotels and see greater contribution from rate growth, we would expect even stronger flow-through to the bottom line. As highlighted in January, we completed the transition of our 13 Marriott-managed hotels to franchise, consolidating management with third-party management companies who, in most instances, were already operating hotels for us in market, enabling us to realize incremental operational synergies. While still early, we are encouraged by the initial results and remain confident these transitions, together with a select number of additional market-level management consolidations, will further drive operating performance for our portfolio. The transition also provides us with additional flexibility and enhances the marketability of these hotels as we evaluate select dispositions in the future. The broad-based strength across our portfolio was noteworthy during the quarter. As Justin highlighted, approximately 2/3 of our hotels delivered RevPAR growth year-over-year despite several markets having challenging comparisons, including wildfire-related recovery business benefiting our California hotels in early 2025 and the inauguration in D.C. This reflects both the diversification of our portfolio and our team's continued focus on hotel and market level execution. Several of our markets stood out as top RevPAR performers in the quarter. Pittsburgh grew 23%, benefiting from multiple sporting events and a strong convention calendar. Alaska grew 21%, driven by strong leisure demand in market, further aided by incremental crew business. Seattle grew 18% with the return of Boeing production business and additional project-related business at a nearby shipyard. Palm Beach grew 16%, continuing to flourish with both strong leisure and business transient demand. And Memphis grew 14%, capturing incremental medical personnel and airline crew business amid increased government demand in market. Based on preliminary results for the month of April, comparable hotels RevPAR increased by over 4%. Despite the ongoing benefit in 2025 from the wildfire recovery business in Southern California, we continue to see broad demand strength across our portfolio and additionally benefited from favorable comparisons over a challenging April 2025, which experienced disruption from government policy-related announcements. Turning back to the first quarter, weekday occupancy was up 170 basis points and weekend occupancy was up 270 basis points. Weekday occupancy followed the same monthly pattern as overall results, down 200 basis points in January, up 200 basis points in February and up over 400 basis points in March. Weekend occupancy was positive throughout the quarter, up 100 basis points in January, 200 basis points in February and nearly 500 basis points in March. ADR trends also strengthened as we moved through the quarter. After negative ADR growth in January and February, weekday ADR turned positive in March, up 1.4%, finishing the quarter up 30 basis points. Weekend ADR was up 3.5% in March and up 70 basis points for the quarter, a meaningful positive inflection that contributed to the broader RevPAR gains. Excluding our L.A. and D.C. markets, which faced challenging comparisons year-over-year related to wildfire recovery and inauguration business, both weekday and weekend ADR grew over 1% for the quarter, indicative of our ability to drive rate growth alongside occupancy in our portfolio. Looking at same-store room night channel mix, the quarter illustrated improvement in transient trends. Brand.com remained our largest channel at 39% of room nights, up 40 basis points year-over-year, while OTA bookings were up 170 basis points to 13% of mix. Property direct declined 90 basis points to 26% and GDS bookings declined 90 basis points to 18%. Turning to segmentation. Transient trends improved each month, while group business remained strong and provided a strong base that helped us grow overall occupancy. Bar led the way with impressive room night growth, particularly in February and March, growing 120 basis points to 34% of our occupancy mix in the first quarter. Other discounts were more steady, declining 50 basis points to 27% of mix. Corporate and local negotiated declined 130 basis points to 17% of mix, but showed steady improvement throughout the quarter and contributed to overall March results. Government grew 20 basis points to 6% of mix, largely driven by comparisons to disruptions in March 2025. Group business mix improved 30 basis points to 17%. Turning to expenses. Same-store hotels total hotel expenses grew 2.6% in the quarter, down slightly to last year on a CPOR basis. Expense discipline was a meaningful contributor to our margin performance in the quarter. Same-store variable hotel expense per occupied room grew just 0.3% year-over-year. Total payroll per occupied room was $43, up just 1%. We also continue to see reduced reliance on contract labor, which fell to under 7% of total same-store wages, a decline of 80 basis points or 7% year-over-year. Non-payroll variable expenses declined 10 basis points on a per occupied room basis and fixed same-store hotel expenses declined 1.5%, driven by a favorable property insurance comparison and property tax appeals. For the quarter, we achieved adjusted EBITDAre of approximately $101 million, up 2.2%, and MFFO of approximately $80 million or $0.34 per share, up 1.9% and 3%, respectively. Turning to our balance sheet. As of March 31, 2026, we had approximately $1.6 billion of total debt outstanding, approximately 3.4x our trailing 12-month EBITDA with a weighted average interest rate of 4.6% and a weighted average maturity of approximately 3 years. At quarter end, approximately 63% of our total debt was fixed or hedged. We had approximately $8 million of cash on hand and $559 million of availability under our revolving credit facility, providing meaningful liquidity. At the end of the first quarter, we had 207 unencumbered hotels in our portfolio. Conversations are ongoing with our unsecured lenders regarding the scheduled debt maturities for this year, and we are confident we are well positioned to address those maturities on attractive terms. Building on our strong first quarter, we are raising our full year outlook. Consistent with the measured approach we took when we initiated guidance, we have continued to be thoughtful in our expectations for the balance of the year, recognizing the economic and geopolitical uncertainty in the broader environment while remaining confident in the underlying strength of our portfolio. For the full year, we expect net income to be between $143 million and $169 million, comparable hotels RevPAR change to be between 0% and 2%, comparable hotels adjusted hotel EBITDA margin to be between 32.9% and 33.9% and adjusted EBITDAre to be between $436 million and $458 million. We have assumed for purposes of guidance that total hotel expenses will increase by approximately 3% at the midpoint, which is 2% on a CPOR basis. We remain confident in our operating model and the ability to manage expenses and are pleased to share we achieved a favorable property insurance renewal last month, which will generate incremental monthly savings compared to our initial expectations. As a reminder, effective January 1, 2026, the company began excluding from the calculation of adjusted EBITDA and MFFO the expense recorded for share-based compensation as it represents a noncash transaction and the add back to net income is consistent with the calculation of adjusted EBITDA for the company's financial covenant ratios under its credit facilities and consistent with the presentation of other public lodging REITs. Demand for our broadly diversified rooms-focused hotels have proven resilient. With recent stronger-than-anticipated transient demand, early summer potentially benefiting from incremental leisure travel related to the FIFA World Cup and easier comparisons to periods adversely impacted by cuts in government spending, tariff announcements and the government shutdown in 2025, we acknowledge that our revised guidance could continue to prove conservative. Our outlook is based on our current view, which is limited and does not take into account any unanticipated developments in our business or changes in the operating environment, nor does it take into account any unannounced hotel acquisitions or dispositions. Recent improvements in occupancy and booking trends highlight the resiliency of travel demand overall and the strength of demand for our hotels specifically. Our recent capital allocation decisions and portfolio adjustments have enhanced our portfolio positioning and performance, and our solid balance sheet continues to provide us with stability and meaningful flexibility to pursue accretive opportunities in the future. We are confident with the experience, discipline and agility of our teams, the broad consumer appeal of our portfolio and the strength and flexibility of our balance sheet. We are well positioned to successfully navigate changing market conditions and capitalize on emerging opportunities to deliver growth and maximize total returns for shareholders over time. That concludes our prepared remarks, and we'll now open the call for questions. Operator: [Operator Instructions] Our first question is from Austin Wurschmidt with KeyBanc Capital Markets. Joshua Friedland: It's Josh on for Austin. So to the extent that you do see more ADR growth moving forward, does the margin guidance assume RevPAR growth is driven entirely by occupancy? Or is it a composition of the 2? And if it was entirely driven by ADR, what would that imply for flow-through? Liz Perkins: That's a good question. And I think generally as we think about guidance, we are looking at the most recent trends and speaking to the impact of ADR headwinds from last year impacting our margin performance in the quarter. And as we lap those comps from last year, specifically related to the L.A. wildfires, we anticipate we'll be able to drive more rate. That is not entirely built into the guide. When we look to revise guidance for Q1, we, given how close in proximity it was to when we reported at year-end and the fact that we're still early in the year, took a more measured approach and really, for the most part, exclusively incorporated the outperformance of Q1 and some improvement in April as well. And so the balance between occupancy and ADR for the remainder of the year as far as guidance goes at the midpoint is still a split, very similar to what we had anticipated at the beginning of the year. But should trends continue and should we continue to see more broad-based demand improvement, we do anticipate, as we lap those comps, an ability to drive rate as we've demonstrated if you exclude those comparisons from even actual results through Q1 and into April. Joshua Friedland: Okay. That's really helpful. And then my second question is around the price sensitivity around the consumer. So I guess what are you seeing from that perspective? And then with the macro risks that are currently out there, what could a potential impact on the consumer look like from a demand perspective within your portfolio? Or I guess more broadly, like what are the possible scenarios that you consider at the low end of guidance? And I'd also be curious to know the flip side of that around what you assumed at the high end. And that's all for me. Justin Knight: Sure. We are not currently seeing significant price sensitivity with our customers. As Liz highlighted in her prepared remarks, as we move through the quarter, we were able to grow both occupancy and rate. And the primary weight on overall ADR growth for the portfolio was the year-over-year comps with both the inauguration, which is a high rate event in D.C., and wildfires, which drove rates in the L.A. area. I think as we look forward to the remainder of the year, as Liz highlighted, we've taken a very conservative approach to guidance for the remainder of the year. And really, what's implied there is very limited growth either in occupancy or in rate. And we recognize that, that is counter to our most recent experience and likely conservative. As we think about how things play out for the remainder of the year, we will be moving shortly into higher occupancy months and anticipate that growth during those months will come increasingly from rate, which will drive incremental margins. And really given the price point for our hotels and perceived value associated with them, we don't anticipate absent a meaningful pullback in demand, broadly speaking, any challenges related to our ability to drive rate on the margin. Operator: Our next question is from Jay Kornreich with Cantor Fitzgerald. Jay Kornreich: You're referencing a lot about how guidance could be conservative, and you mentioned some of the additional components of lapping the easier government demand comps from last year as well as tariffs in addition to some of the potential upside from the World Cup leisure demand. So I guess in those specific areas, I wonder if you could just unpack those a bit more in terms of, I guess, what your potential upside could be from those? And within the government demand, I think that was really your main headwind last year. So as that came back strongly in 1Q, do you see that continuing to be strong throughout the year? Liz Perkins: We're certainly encouraged by the improvement in government demand that we've seen as we lapped the most or the earliest comps from last year from the impact of DOGE and Liberation Day. So we are hopeful that we'll see that continue. Remembering too that as we move into higher occupancy months, should there be broader-based demand or special event compression, we could choose to yield that out, which could make some of our year-over-year comparisons hard to draw meaningful conclusions from if we choose to yield it out. But at this point, given where occupancy levels were for the first quarter, particularly once we entered March and then April, we were able to take incremental government demand and saw improvement around 13% and from a mix perspective approached around 6%. So encouraged from a government perspective. As we move through the year, we did see government steadily improve. And when I say that, the decline year-over-year decreased as we moved into the summer months and then, of course, increased when we had the government shutdown in the fourth quarter. And so I think that the comps as we move throughout the year will be a little bit fluid. But again, encouraged initially by seeing that improvement in group. Justin Knight: And remembering, again, when we issued guidance in the beginning, we anticipated that first quarter would be our most difficult quarter and that we would see improved performance after that. I'm certainly incredibly pleased with how we performed in the first quarter. And our current guidance does not include potential upside from World Cup, though we have seen strong bookings, especially in some of our smaller markets, which we do anticipate would be incremental to the strong demand trends that we're already seeing. Jay Kornreich: Okay. I appreciate that. And maybe just following up on your last comment, Justin, just about some of the World Cup bookings you've already seen. Is that largely coming from where you have exposure to markets where games are being played? Or I think as we've talked about before, the potential for international travelers extending stays, traveling in the U.S. for a week or 2 and maybe some additional markets where you have exposure to. Just any lens of insight into where you expect that and where you've already seen some demand? Justin Knight: It's difficult to determine specifically what's driving demand in markets outside of markets that will benefit from FIFA games. That said, when we look at current bookings, a very small percentage of our current bookings are international. That's consistent with past experience. The bulk of what we have on the books now is domestic, and we continue to anticipate that will be a primary driver. Should we see, as we get near to the games, an uptick in international bookings, that would be incremental. Operator: Our next question is from Aryeh Klein with BMO Capital Markets. Aryeh Klein: Justin, you talked a little bit about, obviously, the conservative nature of the guide, but also that you're seeing positive forward booking trends. Curious if you can just unpack a little bit more about what you're seeing from a forward booking standpoint. It doesn't seem to be reflected in the guide, but it would be helpful just to get a sense of what you're seeing. Liz Perkins: I mean, very consistent with what Justin said. As we look forward, we are beginning to see -- we typically look 90 days out or sort of rely more on what's closer in than further out. And within the 90-day window, you're starting to see certainly some impact from the advanced bookings around World Cup, which is positive. And as we -- even as we enter June, thinking about May outside of the calendar shift, that looks positive as well. So from a forward bookings perspective, we are continuing to see improvements around occupancy and rate as we look forward. Aryeh Klein: And then maybe just on the transaction market, can you just talk a little bit about what you're seeing there and maybe what you need to see to get more active on the trans acquisition front? Justin Knight: Absolutely. I think debt markets have been supportive of transactions for some time. With improving fundamentals, we are beginning to see more interest in the space. And I think for some time there has been a lot of product on the market that would be attractive to us. The challenge has been a meaningful gap between seller expectations and what we would be willing to pay. We've spoken about this in the past, but our acquisitions model runs a comparative analysis to alternative uses of capital, including share repurchases. And as we look at the environment today and pricing for individual assets relative to the implied value or implied multiple in our stock, our stock still screens better. I think as we think about an environment where we would get more aggressive from an acquisition standpoint, it would be an environment where that reverses. And that could happen either as a result of continued improvement in our share price or a reduction in expectations from sellers. And the most likely scenario is a combination of both. And as I highlighted in my prepared remarks, given our history in the space and the flexibility that we have with our balance sheet, as the environment shifts, we're poised to move very quickly. Operator: [Operator Instructions] Our next question is from Michael Bellisario with Baird. Michael Bellisario: My question is for you on the cost side. So 2 parts here. One, could you quantify the insurance savings and/or how much that's boosting your outlook? And then also just with expenses still at plus 2% per occupied room, is the right way to think about it now we're sort of in a steady state? Or are there other puts and takes looking at that, that might cause that 2% number to either inch higher or inch lower? Liz Perkins: Okay. I'll answer the first part. Related to the property insurance renewal, what we assumed beginning in the second quarter through the end of the year was about a $900,000 improvement to the forward guidance for the last 3 quarters. So that's a little less than half of the incremental bottom line impact outside of truing up year-to-date. The other portion comes through April improvement on the top line and flow through there. And then from an expense perspective, we've guided to how the properties have been operating from a cost control perspective. We've gotten very granular from an individual line item perspective and believe that what we've provided is a good run rate. Now certainly if the environment was to shift and a cost line item or something was to materialize differently than what we've anticipated, that could potentially impact how we thought about expenses. But we've had a good trend of very good cost controls and see some improvement on the property insurance line for several years now. And outside of the fixed cost real estate tax comps from last year have seen some good appeals and some steady run rates there too. So we're encouraged about what we've seen from an expense management perspective, and that's certainly factored in here. Operator: Our next question is from Ken Billingsley with Compass Point. Kenneth Billingsley: I have a question. I'm going to follow up on the M&A side, maybe from the opposite side. I know you talked about targets necessarily not fitting what you're looking for. But can you talk about maybe inbounds and what you're seeing in requests for properties you would be interested in selling? Justin Knight: Certainly. And I think for clarification, we've spoken to this at some length in the past. But we're continually in market, both underwriting potential acquisitions and testing potential dispositions. And since -- well, over the past several years, we've tested the market with both individual assets and portfolios looking to gauge pricing and have executed where we've been able to achieve pricing that's most attractive to us relative to alternative uses for proceeds from those sales. I think in any environment we also -- from time to time we see inbounds. I can tell you as we test the market today, we're generally seeing an increased number of potential buyers. So increased interest with a large number of people signing confidentiality agreements, seeking data for the individual assets. And really, I think absent the war or the conflict in the Middle East and fears related to potential impact on energy prices, we would be seeing an even more active market with buyers interested in assets. Should we continue to see growth industry-wide and specific to our portfolio, like we have year-to-date, my expectation is that the market would get meaningfully more active with buyers beginning to stretch for individual assets. And in that environment, we have in our portfolio prioritized assets for potential sale and could act quickly on that side as well as get more aggressive from an acquisition side. Kenneth Billingsley: Is that mix of buyer evolving? Justin Knight: I would say yes. Where we have been executing or successful in executing over the past several months, maybe even a couple of years, has been primarily with local owner operators who have the capacity to drive incremental margins because of their presence in market and lower operating -- cost operating model. Those buyers have tended not to be cap rate bidders. Instead, they're looking more closely at value relative to replacement costs and bidding based on a revenue multiple, which is a very different type of buyer and pricing process and has enabled us to sell at relatively low cap rates and redeploy at a meaningful spread either into our stock or into additional assets. As the market becomes more active, we would anticipate and are beginning to see signs of increased interest from smaller private equity shops with dedicated hotel practice. And then certainly to the extent we're able to sustain the momentum industry-wide that we've seen recently, our expectation is that, that would broaden to some of the larger players as well. Kenneth Billingsley: And lastly, I just want to ask about Pittsburgh and get an idea of on what your expectations were versus -- I believe you said it was 23% RevPAR growth in first quarter '26. But with the NFL draft exceeding expectations, can you talk about how your expectations were met or exceeded? Liz Perkins: Generally -- and it's not unique to Pittsburgh. I think we were encouraged about how many markets performed relative to our initial expectations. So I think general demand was stronger in many markets, and certainly Pittsburgh performed well relative to expectations as well. Justin Knight: Yes. But when you look across our portfolio -- and Liz highlighted a number of markets where we saw strong double-digit growth. For Anchorage, which had an amazing year last year, to again move up double digits in the first quarter was equally -- equally surprised us to the positive. So I think the demand strength across our portfolio was much stronger than we anticipated through the first quarter, and as Liz highlighted, has carried forward into April. Kenneth Billingsley: What I was trying to get at -- and that's good to hear. What I was trying to get at is trying to understand if the consumer is going to travel to these events. And even though we have high expectations that they are resilient and maybe more people are likely to get out to go to these unique events that we're going to see through the remainder of the year. Justin Knight: I think early indications are positive on that front. Operator: Our next question is from Chris Darling with Green Street. Chris Darling: Just following up on the capital allocation discussion, where is your head at in terms of incremental development takeout transactions? And how is the opportunity set for those types of deals evolving? Justin Knight: It's interesting, and we've been fortunate in our ability to find deals that meet our underwriting criteria. But I'll tell you, as we look across the country and as we evaluate development takeouts, the same factors that are limiting new supply in our markets make underwriting development difficult. Meaning I think in most markets cost of construction have increased faster than fundamentals for hotels have improved. And as a result, there are a very few markets where development pencils broadly speaking. That said, I think our appetite for new development has always been limited, meaning we've generally targeted within $100 million a year of new development acquisitions. And so should we consider additional development projects, we would be looking beyond 2028 to future years. And we don't currently have any deals pending in that area or that regard. I think as we think about capital allocation opportunities in the near term, we continue to be focused on the existing assets and our shares. And in an answer to an earlier question, I highlighted how we evaluate those. Given that the forward commitments really are a long ways out, we have a tremendous amount of flexibility in the near term to allocate capital to accretive opportunities and then I think to fund those acquisitions as they are completed. Remembering again the structure of our development deals is such that the developer carries the project on their balance sheet and then our only cash outlay is at the time of completion. Chris Darling: Okay. That's helpful context all around. And then one more for me. Hoping you could elaborate on the early operating trends for your formerly Marriott-managed hotels. And if you could -- I think it's 13 total properties. Can you quantify what percent of overall EBITDA those hotels represent? Justin Knight: I will let Liz work on the second piece. We are very pleased with our progress in the transition. As Liz highlighted in her prepared remarks, there were transition-related expenses. And I think we were somewhat disappointed with sales efforts by the prior Marriott -- by prior Marriott management immediately prior to our takeover of the properties. That said, the new managers have come in and moved quickly and really established themselves in the properties in a way that we think will drive positive results this year. The 13 assets, because of their location, a portion of them are meaningful. A number of them are in California markets that are higher rated markets. And we may have to get back to you with the exact percentage. Liz Perkins: Percentage, yes. I'll have to pull it for you. Chris Darling: No, no worries. I didn't mean to put you on the spot with that one, but I appreciate the thoughts. Justin Knight: Absolutely. Operator: There are no further questions at this time. I would like to turn the conference back over to Justin Knight for closing remarks. Justin Knight: We appreciate you joining us for our first quarter earnings call. We're incredibly pleased with the way our portfolio performed during the first quarter and excited about carrying that momentum through the remainder of the year. As always, as you travel, we hope you'll take an opportunity to stay with us in one of our hotels. And we look forward to meeting with many of you as we begin interacting at some of the upcoming conferences. Operator: Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.
Operator: Greetings, and welcome to the Atlas Energy Solutions First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kyle Turlington, Vice President of Investor Relations. Thank you. You may begin. Kyle Turlington: Hello, and welcome to the Atlas Energy Solutions Conference Call and Webcast for the first quarter of 2026. With us today are John Turner, President and CEO; Blake McCarthy, CFO; Tim Ondrak, President of Power; and Bud Brigham, Executive Chair. John, Blake and Bud will be sharing their comments on the company's operational and financial performance for the first quarter of 2026, after which we will open the call for Q&A. Before we begin our prepared remarks, I would like to remind everyone that this call will include forward-looking statements as defined under the U.S. securities laws. Such statements are based on the current information and management's expectations as of this statement and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially. You can learn more about these risks in the annual report on Form 10-K filed with the SEC on February 24, 2026, and our quarterly report on Form 10-Q for the first quarter and current reports on Form 8-K and our other SEC filings. You should not place undue reliance on forward-looking statements, and we undertake no obligation to update these forward-looking statements. We will also make reference to certain non-GAAP financial measures such as adjusted EBITDA, adjusted free cash flow and other operating metrics and statistics. You will find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, I will turn the call over to John Turner. John Turner: Thank you, Kyle. Before turning to the quarter, I want to frame where Atlas stands today. On the sand and logistics side, the West Texas market is turning. Trucking rates have moved meaningfully off their lows. Logistics margins expanded from low single digits in January to mid-teens by March. Completion activity is building and our mining operations are effectively sold out. On the power side, we have signed a global framework agreement with Caterpillar securing 1.4 gigawatts of generation capacity, and we have just announced our first private grid power purchase agreement, a 120-megawatt deployment drawn from our initial 240-megawatt November order with Caterpillar. The strategic and commercial momentum heading into the balance of the year is the strongest it has been in some time. Turning to our first quarter results. Atlas generated revenue of $265.5 million and EBITDA of $28.4 million, representing an EBITDA margin of 11%. Results were impacted by severe winter weather, elevated maintenance at our Kermit facility and higher third-party logistics costs. Each of these items has been resolved, and we expect underlying margins to normalize beginning in the second quarter as the headwinds roll off and contracted volumes ramp. The clearest signal of the demand recovery is in our bone book of business. Customer volumes have moved our mining operations to a sold-out position for the second quarter at current production rates. And we expect our plants to remain very busy for the balance of the year. As contracts roll off or if we elect to increase production, additional sand sales this year should come at higher pricing. The macro backdrop is supportive. WTI is hovering near $100 a barrel and the 2027 strip has moved higher, but we want to be clear that our outlook is anchored in customer commitments and completion activity we can see today, not in any single price level holding. While the West Texas sand and logistics market has been in a rut for the better part of 2 years, Atlas never stopped investing in our infrastructure. When the markets get tight, our investment in our plants, logistics network and last mile equipment reinforce our position as the most reliable supplier in the Permian. Now let me turn to power, where we are deploying capital with the same operating discipline that built our sand and logistics franchise and where we believe Atlas' industrial capabilities translate directly. We have intentionally structured our power strategy differently from some peers by pursuing full scope power purchase agreements in which Atlas owns and operates a complete solution, including balance of plant. This creates stickier, longer-term customer relationships, provides significant advantages at contract renewal, delivers superior reliability compared to the grid in many cases, allows for greater pricing flexibility once equipment costs are recovered and creates high barriers for competitors due to the sump cost and complexity of the facility. With grid constraints likely to persist for years, we believe this PPA model is the right long-term strategy for our shareholders. In November, Atlas placed an initial order with Caterpillar for 240 megawatts of power generation equipment, sized in response to specific customer projects. As commercial momentum built early this year, we recognize the generational nature of this opportunity and entered into a separate global framework agreement with Caterpillar that secures an additional 1.4 gigawatts of power generation assets for delivery between 2027 and 2029. Together, with the initial 240-megawatt order, these commitments support our objective of owning and operating more than 2 gigawatts by 2030. The announcement of a global framework agreement immediately elevated our commercial position. Our commercial team went from hunting deals to being hunted. With power generation equipment in short supply, our secured supply chain and our ability to offer surety of delivery have moved us from medium-sized industrial projects into serious contention for data center deployments. On April 1, we announced our first private grid power purchase agreement, a 120-megawatt deployment that will be supplied from the initial 240-megawatt November order. The PPA carries an initial 5-year term with 2 additional 5-year extension options. Equipment delivery and construction are expected to begin later this year with commissioning targeted for the first half of 2027. We expect this 120-megawatt deployment to generate approximately $50 million to $55 million of adjusted free cash flow on an annualized basis once fully deployed. To support the customer during construction and commissioning, we have already begun providing bridge power with mobile generators. The combination of these bridge deployments and other recently executed microgrid deployments is expected to contribute approximately $35 million in incremental adjusted EBITDA over the remaining 9 months of 2026, weighted toward the back half of the year as deployment ramp. Finally, in April, we successfully priced $450 million of 0.5% convertible senior notes due 2031. Concurrently, we entered into a capped call transaction with initial cap price of $22.32 per share, a 28% premium over last Thursday's closing price of $17.38. We used a portion of the $386 million in net proceeds to pay down our outstanding balance under our ABL and outstanding advances under our master lease agreement and interim funding agreement. We intend to use a portion of the remaining net proceeds to finance the initial 240-megawatt order. On a cash coupon basis, this transaction reduces cash interest expense of this quantum of capital from high single digits to 0.5%. The cap call meaningfully mitigates dilution up to the cap price, though we recognize residual equity optionality remains embedded in the structure. In summary, Atlas is well positioned to grow our power business from expected deployments of roughly 550 megawatts next year to approximately 2 gigawatts by the end of the decade. Combined with a recovering sand and logistics business, this trajectory would meaningfully transform our cash flow profile and create substantial long-term value for our shareholders. With that, I will now turn the call over to our CFO, Blake McCarthy, who will review our financials in more detail and provide an update on our sand and logistics operations. Blake McCarthy: Thanks, John. At the time of our Q4 call, we were probably a bit more bullish about the prospects for oil than most industry prognosticators, as we are forecasting global oil supply and demand coming into balance later this year. Regardless, we are aligned with most forecasts that call for slightly flat to down U.S. activity levels in 2026. Well, as is par for the course in the oil field, the backdrop has changed in a hurry. The turmoil in the Middle East and its impact on global oil trade flow have led to a rapid recalibration of oil prices. While none of us are sure how the current conflict will end, hopefully, peacefully and quickly, we're increasingly confident that the floor on oil prices over the medium term has risen significantly. The commodity markets are signaling an increase in the call on U.S. unconventional production. While we've seen some signs of customers bringing activity schedules forward, the number of true completion crew additions in the Permian remains in the low single digits thus far. The potential recovery in West Texas activity in 2026 will likely look quite different from the recovery post-COVID. Customers aren't sitting on a massive inventory of DUCs like they were coming out of the pandemic. And honestly, the service industry doesn't have the ready-to-go idle equipment stock it did at that time. Instead, ramping production will require rig additions, rigs that will need to be recruited, completion spreads that will require crew-ups, and likely capital upgrades and ancillary services will need to be secured. Current pricing levels for all of these just don't justify the investments service providers will need to make to meet incremental customer demand. Thus, we are likely at the front end of a pricing recovery across the North American services complex. It's still very early, and the wild volatility we've seen in the commodity tape based on who's tweeting what certainly doesn't inspire extreme confidence, but the realities of the impact that current geopolitical events are having on physical global inventories are becoming increasingly self-evident, and the strip always eventually responds in kind. While we expect the larger operators to take a more cautious approach to activity additions in the near-term, the universe of smaller operators will likely front run the big boys as they historically have always moved to maximize their value capture during both markets. The West Texas oil patch is a small community that thrives on industry chatter, and we're starting to hear the right things about activity increases in the second half of the year. Thus far, we have seen a few operators take advantage of an elevated strip to accelerate what remains at their drilled uncompleted inventory, which directly led to us adding 1 million tons of incremental allocated volume through year-end. The limited response by most public E&Ps to date is not all that surprising, as they will likely evaluate the 2027 curve around midyear prior to making capital allocation decisions. It's not going to take many crew additions for the sand supply to get tightened. Today, we estimate approximately 75 frac crews operating in the Permian. Due to the increase in sand intensity of completion processes over the past few years, we believe a 10% increase in frac activity would conservatively add north of 7 million tons of incremental sand demand. Based on what we know about the market, it's going to be tough for the industry to produce enough to meet that demand, much less transported to the well sites. While we haven't seen meaningful improvement in pricing just yet, you can feel the stage is getting set. While we remain cautiously optimistic on higher mine gate pricing, we have already witnessed higher logistics pricing. Last year was the perfect storm for poor logistics pricing. Post liberation day, we saw both falling activity in the Permian, along with weakening trucking rates nationally. Adding the impact of the June Express ramping midyear, and trucking rates fell below the levels we saw during COVID in the second half of last year. Margins for third-party trucking rigs turned negative in the fourth quarter. That rubber band finally snapped in early January as a small ramp in activity exposed the fragility of the logistics network in the Permian. We saw a spike in trucking rates even before the Iran conflict, and late February, higher diesel prices led to another round of rate increases. In the over-the-road market nationwide, tender rejection rates in March were approximately 14%, defined as typical of seasonal dips. This signifies a tighter, more expensive freight market with rates holding more than 800 basis points higher than 2025 levels. Rising rates nationally will pull rates higher in West Texas as carriers must now keep up with the over-the-road market. Although there is always a lag in passing those higher rates through to our customers, we did witness mid-teen logistics margins in March compared to the low single-digit margins in January and February. Higher trucking rates can also be a tailwind for higher mine gate pricing. Disadvantaged mines that are several mileage bands further away from activity sites are less competitive when hauling rates normalize. Higher rates also make the value proposition of the Dune Express even more obvious. Trucking rates in West Texas likely have more room to run as rates in the Permian are still about 10% below national over-the-road rates. Historically, Permian trucking rates are usually at a premium to the over-the-road market due to the wear and tear of driving on lease roads. Increased logistics pricing typically front runs increased mine gate pricing, so the improvements we are seeing now are very welcome. Moving to our financials. First quarter 2026 revenue of $265.5 million broke down to the following: proppant sales totaled $105.6 million, power equipment sales, $3.3 million; logistics, $139.1 million, and power rentals added $17.5 million. Total proppant sales volume was up sequentially to 5.7 million tons, which does not include approximately 130,000 tons of third-party sand purchases. Our logistics business set a quarterly delivery record of 5.5 million tons. Our average sales price for proppant for the first quarter was approximately $18.19 per ton, not including shortfall revenue of $1.9 million. For the second quarter, we expect volumes to be up sequentially, with the average sales price to be slightly below $18 per ton. We are effectively sold out for Q2. First quarter cost of sales, excluding DD&A, were $214 million, consisting of $74.7 million in proppant plant operating costs, $2.1 million for power equipment costs, $127 million of service costs, $5.9 million in rental costs, and $4.3 million in royalties. For the first quarter, per-ton proppant plant operating costs were approximately $13.86, including royalties, up sequentially from the fourth quarter. Higher expenses related to maintenance activities following the winter storm at our flagship current facility were the primary driver of the elevated OpEx per ton. Q1 cash SG&A, excluding litigation and nonrecurring items, was $23.3 million. SG&A, excluding litigation expenses, is expected to average approximately $21 million to $22 million for the remainder of the year, per quarter. Growth CapEx for the quarter was $7 million, the majority of which was tied to our Power segment and maintenance CapEx of $24.6 million. Q1 will represent the high watermark for capital spending in our Standard Logistics business for 2026, as spending was primarily tied to essential equipment and preparatory work ahead of the Twinkle dredge deliveries. We are adjusting our 2026 CapEx guidance to approximately $350 million to $375 million due to bringing the 240-megawatt purchase on the balance sheet with the recent convertible offering. Maintenance CapEx of approximately $45 million is planned, with approximately $305 million to $330 million dedicated to growth, the vast majority of which is tied to the build-out of our private grid power business. Looking ahead to the second quarter, we are forecasting sequentially improved sales volume. We are effectively sold out of our productive capacity for the second quarter, as the step-up in production would likely require incremental personnel that current sand prices do not justify. Additionally, our visibility to second-half activity levels and, consequently, volumes is improving rapidly. Due to the increased fixed cost absorption and improved production efficiency, OpEx per ton is forecast to climb in the second quarter to approximately $12.75. OpEx per ton is expected to continue improving over the remainder of the year as new operating processes have begun bearing fruit at our fixed mines. In the first quarter, our logistics business was impacted by a spike in third-party trucking rates and a late-quarter increase in diesel prices. However, as mentioned, logistics margins improved progressively throughout the quarter from low single digits in January to mid-teens by March. We are currently forecasting mid-teens logistics margins for Q2. Additionally, as previously mentioned, Atlas's power business is building contracting momentum rapidly. During the first quarter, the company executed multiple contracts spanning upstream and midstream microgrid projects and bridge power deployments in the commercial industrial market. We expect to generate approximately $35 million in incremental adjusted EBITDA over the remaining 9 months of 2026 from bridge and microgrid deployments. Looking at the current run rate for March EBITDA and with the incremental contributions coming from our Power segment, we expect Q2 EBITDA to be approximately $50 million. I will now hand the call over to our Executive Chairman, Bud Brigham, for some closing remarks before we turn the call over for Q&A. Bud Brigham: Thank you, Blake. First, I'm going to start with some context for my comments. It was 35 years ago as a young geophysics that I sit out on my own with a small amount of capital and founded Brigham Exploration. Our plan was ambitious to leverage cutting-edge technology to out-innovate the competition and create lasting value for shareholders. By hiring exceptional people, aligning them tightly with our investors and empowering them in an entrepreneurial innovative culture, that model delivered 3 IPOs and numerous successful exits. Along the way, our E&P companies drove several industry-transforming advancements. In the 1990s, we pioneered the use of 3D seismic, delivering unprecedented exploration success rates, leading to our first IPO in 1997. In 2004, we were an early mover with horizontal fracking in the oil plays and built a position in the Bakken. In 2007 and 2008, we began outperforming peers in the Bakken, in part by increasing frac stages. In 2009, we completed the first successful 2-mile-long lateral with over 20 frac stages, which extended the Bakken play more than 70 miles to the west and accelerated development across all the major U.S. shale basins. And in 2014 and '15, Brigham Resources successful wells extended the Delaware Basin significantly to the south. Then in 2017, we founded Atlas and brought that same innovative spirit to oilfield services with 4 more first. First, our team designed, permitted and built the industry's first and only long-distance sand conveyor system, widely believed impossible at the time, which reliably delivers premium proppant 42 miles into the heart of America's most prolific producing region. We were also the first to autonomously truck proppant, the first with double and triple trailer configurations in U.S. oil fields and the first and only company to dredge mine proppant in the Permian Basin. As John and Blake have shared, we're only getting started. Our proven ability to innovate and execute large complex infrastructure projects gives us a unique advantage in addressing today's energy challenges. And of course, over that 35-year career, I've experienced many cycles and disruptions, but I've never seen demand inflections as powerful as the ones we're witnessing today. As the largest premier proppant and logistics provider in the world, we stand ready to respond. We are exceptionally well-positioned to support the delivery of incremental oil supply to meet global demand, demand which has only intensified with the recent Middle East disruption. As in the prior up cycles, we are positioned to deliver strong cash flow growth via proppant and logistics over the next several years. But what makes this cycle strikingly different for Atlas is that we're also optimally positioned to help meet America's rapidly expanding power needs. Our recently announced power contract, combined with the global framework agreement we just signed with Caterpillar, gives us both surety of supply and the scale to be a leading player in the fast-growing private power market. With these milestones and those still to come, we are clearly signaling our capabilities to both investors and customers facing acute grid constraints across Texas and the United States. The future for Atlas and Power is here, and I believe we're emerging as a leader in this critical market. Thank you for joining us today. I'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] The first question is from James Rollyson from Raymond James. James Rollyson: John, maybe start with you on a question on power. If we go back just a quarter ago, you were kind of focused on the commercial and industrial space, obviously targeting a specific customer with the original 240 megawatts. And as you've upped that ante by a pretty large amount with the global framework agreement with Caterpillar, and you guys mentioned that people are now calling you instead of the other way around. I'm curious if that end customer has shifted over to the data center guys or not just given the magnitude of the power you guys are looking to add. John Turner: Yes. Thanks, Jim. I'll start, and then, Tim, you can add to this. Yes, Jim, you're right. I mean the GFA or the global framework agreement has had a profound impact on Atlas' commercial opportunity set. Before the agreement, our pipeline was weighted towards smaller industrial deployments. The combination of secured supply and access to the premium equipment from Caterpillar has changed the customer conversation that's really been overnight. Both the size of deployments we're being invited into and the quality of the counterparties has significantly changed as well. And then like I mentioned on my call, I mean, reverse inquiries are now active. We're having a lot of reverse customer inquiries now on a daily basis. And that's a meaningful part of why we're so optimistic about our path forward with power. Tim, do you want to add anything to that? Tim Ondrak: Yes. I think as John mentioned, we're getting a lot of inbounds. And the goal of signing the global framework agreement was to secure power for the opportunity sets that we had in front of us, which were heavily weighted towards as John mentioned, smaller industrial deployments. And when I say small, they're 50 to a couple of hundred megawatts. And since signing the global framework agreement, we've started to get some inquiries from some of the bigger data center projects. So, I think our queue going into that as far as an opportunity set was roughly 4 megawatts or 4 gigawatts. And I would say, since signing that agreement, that queue has grown to somewhere between probably 8 and 10 gigawatts. And these are quality projects where we've gone through a stage of vetting to see if they're real and have determined that as the project moves forward, we would like to participate. James Rollyson: It sounds like you can place a lot of equipment with a smaller number of customers. And then maybe as a follow-up, kind of switching gears over to the sand and logistics business. Blake, you talked about incremental opportunities and kind of how -- we've heard this earnings season, some of that early indication of recovery of activity in the U.S. land and obviously, the Permian will be part of that. But I'm curious, as you think about incremental sand volumes where you're sold out today, what kind of price level do you need for sand to actually consider adding to your capacity, mining capacity to actually provide that sand? Blake McCarthy: Yes, that's a good question, Jim. And I think that, that question basically assumes that at any one point, a player has control over the price of sand, which, as you know, I mean, it is such a hyper volatile commodity where, as we talked about in the past, right, supply gets a little bit over demand just on a macro basis, and it quickly falls to that marginal price of production for the industry, which is where it's been at for over 18 months now. And the thing about sand is though it is the critical raw material to the completion process. It gets a little bit undersupplied and it doesn't just move $3, $4. It moves up in a hurry. I think that as the largest player, right now, there hasn't been a lot of movement in price. We've seen some stuff around the margins. I think one encouraging thing we've seen is some of the more astute operators have tried to move forward their RFP processes where typically, we're not talking about this stuff until November. And some of the smarter guys are doing exactly what I would do, which is like, hey, the writing is on the wall on this, things are going to tighten up. If I could lock in now, that sure be good for my well cost come '27 and going forward. I think that where we stand is like, hey, we're more than happy to help you secure your volumes, but we're not going to lock in these prices for the long-term. So that's a bit of give and take. In terms of adding production, for us, like if you look at where we're at now versus what our nameplate is, like there's still some upside. But that really would require adding ships and probably some minimal capital investment. And it's just something that we're not really going to be doing until you get to north of that $23 to $25 range on sand pricing because that's really where the industry starts earning its cost of capital. In a perfect world, we keep sand in those type of normalized prices. That's really a sweet spot for Atlas, and it doesn't encourage incremental supply. But sand always moves -- when it goes down, it goes down in a hurry, when it goes up, it usually goes way higher than we ever expect. So, it's something that we're watching very closely. John Turner: Yes. I think one thing to note is back in 2021, sand was around $20 per ton. We got to March of '22, it was north of $30 on its way to $40 a ton. So, like Blake said, I mean, sand prices swing wide. I mean, they're obviously very volatile. So, it's just something that -- when that supply-demand balance when we're undersupply, when that shifts, it shifts quickly. Operator: The next question is from Derek Podhaizer from Piper Sandler. Derek Podhaizer: So encouraging to hear all the comments around the logistics margins going from the low-single digits to about the mid-teens here and guiding that for the next quarter. On the trucking rates specifically, how should we think about what a 10% uplift in the Permian activity would do to those trucking rates, which appear to be already tightening. Blake, I think you said they're still 10% below the national average. So maybe just some additional color around where you think trucking rates can go if we do get an uptick in activity here. Blake McCarthy: Yes. That's a great question, Derek. Apologies in that trying to pin down where trucking rates are right now is like trying to hold on to Greece pig. There's a lot of moving variables. Yes, as I mentioned in the prepared remarks, the typical relationship with over-the-road, like over-the-road national freight right now versus Permian rates is inverted. Typically, you need rates at like a 10% to 20% premium to over the road to incentivize drivers and truck owners to beat up their assets in the oilfield. But currently, Permian rates are still at a discount. The other thing that we're really watching is diesel. That's a direct hit in the wallet for trucking owner operators. And while most of our customers have been quick to work with us on passing those costs through, we have heard quite a few anecdotes that certain operators refusing to accept those pass-throughs or only accepting a percentage of that. In my opinion, that's really shortsighted as trucking margins were already razor thin across the industry. So if not in the red for the smaller trucking companies. So, forcing them to eat the rapid diesel inflation just invites a trucking crunch. And we're starting to see that as industry watchers can tell you that several trucking companies are choosing to park assets versus operating at a loss. That's continued tightening in the trucking market. That's something we're certainly watching as the higher trucking rates go, the more important the location of your mines and the breadth of your logistics network, the more important that becomes. So, the combination of our mobile mines in the Midland Basin and of course, logistical advantages provided by the Dune Express for our fixed mines that service the Delaware, that puts Atlas in a really strong position versus many of our competitors' mines and actually probably adds to our ability to push mine gate pricing. In terms of what it means in terms of like, hey, you see a 10% move in trucking rates and what that does to our margin profile. That advantage, that margin advantage provided by the Dune Express, that just throws gas on that fire, right? Because if you're taking those trucking rates are being forced by cost inflation to the owner operators, yes, we get hit on that on the final haul from like end of line or from the state line facility to the well site, but it's such a smaller percentage of the overall logistical haul because of how much of that chunk of that haul is covered by the Dune Express. And so, it becomes -- it really starts to push our incrementals. We were encouraged to see the improvement from the low-single digits into the mid-teens. We're watching that now and expecting it to kind of be in that mid-teens margins through this quarter. But as we move into the back half of the year, it's certainly something we're going to start pushing. John Turner: Yes. And I think the diesel prices, I mean, that's obviously a big tailwind on the Dune Express because that's electric, moving that sand 42 miles via an electric conveyor that's also big. And I also think there's also a shortage of trailers lead time on those trailers. Now a lot of your trailer manufacturing comes from Mexico, there's a tariff on it. So, I think you're going to start seeing shortages in a lot of places here as we move through the -- as we move into the rest of the year. Derek Podhaizer: That's all really helpful color. Right. So, we talked about the demand is not a problem. Maybe thinking about the supply side. I think in previous calls, we've talked about the Tier 2, Tier 3 sand mines out there. I think we've had something around like 20% of supply coming out of the market. But if there's going to be this call on demand around, I think you said 7 million tons for this year if we start adding completion crews back. How do you think about those mines being incentivized to come back to the market? Because when these mines shutter, they never truly shutter or come out of the market and they can come back to life pretty quickly. So, have you surveyed and kind of looked around the supply stack to see which mines have the ability to come back, maybe some that have been truly taken out of the market? Just maybe some comments and color around the supply stack as you see it today and what it could -- and how it could respond if there is a big call on demand. John Turner: Yes. I can start with that. I mean we can only go by experience of what we've seen in the past back when prices really started when we saw this change flip in the supply and demand balance. I think a lot of -- a number of mines that had been open, had closed were slow to open their doors and commit a lot of capital until they had longer-term contracts. And so I think that's really going to impact that. I also think your proximity mines are going to be a lot more advantaged position here because of where diesel rates are and where the trucking rates are. Do you want to add anything? Blake McCarthy: Yes, that interplay between just the logistics haul, right? Like it's not just their cost to produce at the mine, but it's also how mines that are located at the kind of the fringes of the plays. If you got a mine that's to the extreme south or something like that, like with what you're seeing in terms of diesel inflation, those haul become really cost prohibitive. And so, you really need to see mine gate pricing move in a big way to incentivize those mines to really to gear up. And like John said, like it's it'd be a little foolhardy to do it like without, hey, I can get a spot sale here at this price, which would -- if I extrapolate that out 2 years, it incentivizes that capital investment. But if you don't have a contract, that's a heck of a bet. Bud Brigham: And related to all that, we should also mention personnel. I mean, it's a real challenge to find labor that can operate these plants. And so that's going to be a challenge as well. John Turner: And really, the data center boom that's going on in what I would call Central Texas, maybe Central West Texas a little bit, around Abilene and places like that, is really pulling a lot of workers out of the oilfield right now. And so, because there's all this construction trades and things like that, that's typically where we go to pull our manpower from. It's making it difficult to hire. So, there are a lot of other factors going on here than there were back when these mines opened in 2022. I mean, there's a lot more going on. Operator: The next question is from Sean Mitchell from Daniel Energy Partners. Sean Mitchell: Maybe turning back to power, can you guys talk about the specific equipment that CAT is providing to you in this global framework agreement and why these units are probably well suited for the private grid versus other options? Tim Ondrak: Yes. Sean, this is Tim. I'll take that question. The assets we're purchasing from CAT are really two engine platforms. One is a medium-speed engine, one is a high-speed engine. Those are both designed to operate in continuous duty. The medium-speed is a 4-megawatt unit. The high-speed engine is a 2.5-megawatt engine. And we feel like these are assets that we want to own and operate for decades. They each have different characteristics that help support our customer needs. So, it's really kind of project-specific on what units we would put on specific projects. But our confidence is not only in the history of those engines -- I think one of them has not had a design change in 20 years, which tells us it's out doing the work and will continue to. And the other has had some design changes, there are some different models available to us under that agreement. And we can use those models to match customer demand just depending on load requirements on an operating basis. But what excites us about both of those is that they come from probably the most respected OEM in that space, and really in several spaces, in Caterpillar. The backing we get from that helps us predict maintenance costs, helps us to address issues quickly if they arise, and ultimately supports a Tier 1 portfolio of assets that we operate for customers. Operator: The next question is from Scott Gruber from Citigroup. Scott Gruber: Maybe turning to the OpEx side on your sand production business, I want to double check the OpEx per ton guide embedded in the Q2 EBITDA guidance. I think I heard $12.45 per ton, so I want to check that. And then obviously improvement will come with the new dredges, where do you think OpEx per ton lands now on a normalized basis, and when do you think you can get there? Blake McCarthy: So a correction on that, Scott, the OpEx per ton guide for Q2 -- embedded in the Q2 guide is $12.75. Yes, thanks for clarifying. I have a tendency to trip over my own tongue. Yes, I think that we're obviously, it's a fixed-cost absorption business. And so, the more - now that we're starting to get closer to sold out, that is sold out for Q2 at the current production capacity, that's obviously a tailwind. We're still in the process of commissioning the new dredges at the flagship Kermit mine. Once we get those on, that's going to lower our variable cost, and that will start to flow through in terms of operating leverage. As we push forward through the year, that will continue to trend down. We'll probably get an 11-handle on it towards the September–October timeframe. Obviously, that continues to be based around volume. But longer-term, our mines have been operating at elevated OpEx for a while now, but we still got -- our goal is to get back to the high 10s on a full run-rate basis once we get them optimized across the company. And we've got -- I think there's a lot of stuff going on under the hood that we're very excited about in terms of process improvements at the plants, more efficient maintenance, and things like that. And we're really making some real headway there. And so, I think it would continue to be a positive trend as we work through the rest of the year. Scott Gruber: I appreciate that. And then turning back to logistics, obviously encouraging trends on the trucking side, and you mentioned how that will -- is there a positive influence on Dune Express pricing? I'm wondering kind of the timing around that poll. Are your Dune Express volumes, is the pricing on those volumes locked in for the year, or could those reset at some point this year? Blake McCarthy: A lot of those contracts have either biannual or quarterly pricing visits. Right now, like I said, it's still early, so you haven't seen much movement in terms of actual sand pricing. You have seen movement in trucking rates. With the Dune Express volumes, we really look at those kind of as a total cost of delivered tons. So, like, yeah, we add those together, and it's through the lens that we want the operator to look at, because that's certainly going to be to our advantage as we move through this cycle. It's probably more, you know, as later in the year, it might be a slight tailwind. For those bigger contracts, it's going to be a bigger tailwind as we move into '27. John Turner: But our trucking pricing resets a lot more frequently than sand pricing does. Yeah, it's quarterly on the sand pricing. I mean, on the trucking prices, sorry. Scott Gruber: Yeah, I got you. But those kind of integrated deliveries, the upside really comes next year on the margin front. Blake McCarthy: That'll probably be the biggest lever. Operator: The next question is from Keith Mackey from RBC Capital Markets. Keith MacKey: Maybe just sticking on the sand price theme, can you just comment on your contract durations and contract amounts? Roughly how much of your sand could reprice between now and the end of the year based on the contract or agreement schedule that you currently have in place? Blake McCarthy: Yeah. We tend to try to contract as much of our sand as possible through the RFP process. I think that there's probably in terms of stuff that's fully free float to spot. If you look at the back half of the year, we could probably reprice up to 20, 25% of our contract portfolio. On top of that, as people look to lock in tons for '27, that probably opens the conversation to, hey, let's move the entire contract to move levels there. So, there is some upside to pricing as we move through the rest of the year, but it's really to reprice the entire contract portfolio. It's going to be kind of as you move into that full 2027 RFP season. Keith MacKey: Okay. Makes sense. And then can you just run us through a little bit more on the dredge implementation and the timelines there for the new twinkle dredges that you've got coming in? And just how does that align with the OpEx per ton guidance that you've been running us through, Blake? John Turner: On the timing, the first twinkle dredge on location, it's built. They're expanding -- they're big in the pond right now. We would expect that dredge to be floated probably by the end of the quarter, when I say quarter -- into the second quarter. The other -- the second dredge arrives here, I believe, starts arriving here probably in June sometime. And then I think they've got to construct the dredge on site. And I would say that we probably won't see a full impact on our -- from the dredge probably until end of the year, fourth quarter, maybe. I mean, because I don't think we -- while they'll both be floated probably in the third quarter, I think it's going to be -- give some time for us to commission them and get them running where they need to be. So, I mean, the guidance that we've given, I don't think it incorporates this. Blake McCarthy: So, there's no impact from that in Q2. And then the way to think of that from a model mechanic standpoint is that right now, that variable cost of sand is closer to $5.50 to $5.75. When those dredges get running, that number gets -- has a four handle on it. And so that really starts to flow through in terms of, like I said, the variable cost operating leverage. Operator: The next question is from Don Crist from Johnson Rice. Donald Crist: On the global framework agreement, I just wanted to ask about the delivery schedule. Is it pretty constant over the '27 through '29 period? Or is it more back-end weight? Just kind of any color around the delivery schedule on that GSA? Tim Ondrak: Yes, Don. So, the delivery schedule on 2027 is kind of last three quarters of the year. We've still got 120 megawatts from our first order kind of pre-framework agreement that we expect to be able to slot in there. And then in 2028, it's fairly constant and accelerates as far as overall size of megawatts in our delivered slots. Blake McCarthy: Yes. So, I think it's more weighted to '27 and '28 with a lesser commitment in '29. But as Tim and John talked so enthusiastically about, like as we move forward and actually start to contract some of these assets, we'll probably be looking -- we have the ability to upsize that commitment at the later stages of the contract and it's something that we're going to be exploring. Donald Crist: And just from a kind of contract timing, would your -- and I know it's very fluid and these things have to go through boards and all kinds of things. But just are you -- is your goal to have that contracted, that incremental capacity contracted, say, nine months before it is delivered or is that too aggressive? John Turner: I think what we found out and obviously, what others have found out is that talking about timing on these contracts is very difficult. But our goal is to get it contracted as soon as we can. But I don't want to put out any timelines out there because they take time. And these are very complicated transactions, complicated contracts and it takes a while for negotiation because we're talking about 15- to 20-year power agreements with counterparties. And so, we don't want to put a timeline on that what our goal is. I mean we just want to make sure that it's contracted when we start deploying it. Blake McCarthy: Yes. The one thing I will say is that compute power is a real bottleneck. And so, there is a lot of urgency to move from this customer base. And so obviously, there's urgency on our end is like, hey, we want to get these contracts. There is a lot of urgency from them that's like, hey, I need this power and I need this timeline. And there is a considerable construction runway where you actually go from, hey, we signed a contract to where they're actually providing power or getting -- we're providing power to them. And so, it is to both parties' advantage for these negotiations to move as quickly as possible. But as John said, they're really complicated negotiations big contracts. And so, each one is like an M&A transaction. And so -- and when you're signing contracts of this term, it's infrastructure. You want to make sure you get it right because you got to live with those contracts for a very long time. Tim Ondrak: Yes. And I think the other element that has kind of changed the dynamics around those discussions is just the number of inbounds we've gotten and the counterparties. And so, when we look to build a contracted business that's 15-, 20-year commitments, I think we did a great job on asset selection in the global framework agreement. I think we've got a great team. And the other part that makes a good deal is a good counterparty that we want to work with for that period of time. And so given what's in our pipeline and how quickly it's expanded, we're in a very fortunate position where we've got a little more say in who our counterparties are going to be for those contracts. And so obviously, something we're all looking forward to, and we'll share details as they come. Donald Crist: I appreciate the color. When a 500-megawatt contract can be well over $2 billion. It's understandable that it takes a while to get across the finish line. So, rooting for you. Operator: There are no further questions at this time. I would like to turn the floor back over to John Turner for closing comments. John Turner: Yes. Thank you, operator. And I want to thank everyone for all the questions today. And before we close, I want to step back from the quarter and tell you why I believe Atlas looks fundamentally different 2 years from now than it did or than it does today. Start with what we announced last month, the 120-megawatt power deal, the power purchase agreement that we signed on April 1, which is expected to generate $50 million to $55 million of annual adjusted free cash flow once it's fully deployed. Returns on individual contracts will vary. They will depend on the customer and the market, term length, contract structure, et cetera. We would not expect every megawatt across our portfolio, our broader portfolio to deploy at these same economics. But this contract is a meaningful proof point of what the model can produce, and it represents a small fraction of the 2 gigawatts we expect to own and operate by 2030. We're not a company adding power at the margin. We're building a long-duration contracted cash flow stream on top of the sand and logistics franchise that is self-inflected at this time as well. And we are doing it with secured supply from Caterpillar at a moment when -- and obviously, Caterpillar is a great counterparty. And it's at a moment when generation equipment is one of the scarcest assets in the U.S. economy. And the logistics business is the engine that funds this transformation. And that engine is accelerating. We're effectively sold out as we've talked about for the second quarter. We talked about our logistics margins are now running in the mid-teens with that strength expected to carry through the second quarter, and we are guiding to approximately $50 million of EBITDA in the second quarter, which is roughly 76% sequential increase from the first quarter. The conditions Blake described, limited completion crew availability, tight equipment and rising trucking market rates, historically, we're the most reliable supplier in the basin and that is Atlas. And we've seen that in the past. We've also recently positioned our balance sheet to fund this growth without compromising returns. We talked about that through the convertible pricing and which, I guess, -- and then as Bud noted, in his 35 years in the industry, he has never seen two demand inflections of this magnitude converge at the same time, surging global oil demand on one side and then the acute U.S. power constraints on the other. And Atlas is positioned itself to serve both of those. And we have the assets, the contracts, the supply chain and the capital to deliver, and we intend to. Thank you for your time and your questions and your continued support. We look forward to updating you guys on our progress next quarter. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's 2026 First Quarter Earnings Conference Call. This call is being recorded. [Operator Instructions] Thank you for participating in Tennant Company's 2026 First Quarter Earnings Conference Call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin. Lorenzo Bassi: Good morning, everyone, and welcome to Tennant Company's First Quarter 2026 Earnings Conference Call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Huml, President and CEO; and Fay West, Senior Vice President and CFO. Today, we will review our first quarter performance for 2026. Dave will discuss our results and enterprise strategy, and Fay will cover our financial. After our prepared remarks, we will open the call to questions. Our earnings press release and slide presentation that accompany this conference call are available on our Investor Relations website. Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations of future performance. Such statements are subject to risks and uncertainties, and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today's news release and the documents we file with the Securities and Exchange Commission. We encourage you to review those documents, particularly our safe harbor statement, for a description of the risks and uncertainties that may affect our results. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items. Our 2026 first quarter earnings release and presentation include the comparable GAAP measures and a reconciliation of these non-GAAP measures to our GAAP results. I'll now turn the call over to Dave. David Huml: Thank you, Lorenzo, and good morning, everyone. Thank you for joining our Q1 2026 earnings call. This morning, I will begin with an overview of our first quarter performance, highlighting the key takeaways from the quarter. I will also provide an update on our North America ERP recovery, discuss progress in our AMR business and TNC robotics venture, share our outlook for the year and outline how we think about capital allocation more broadly. Fay will then walk through the quarter's financial results in greater detail and cover our full-year guidance. With that, let me start with our performance in the first quarter of 2026. Orders totaled $327 million, an increase of 10% year-over-year, demonstrating demand momentum. Growth was broad-based and driven by increased customer demand, execution of our enterprise growth strategies, and continued strength in robotics. Backlog increased approximately $32 million from year-end to $109 million. This growth provides clear evidence that our customer relationships remain strong and end market demand is healthy. Overall, our performance underscores the strength of our foundation and reinforces that our portfolio, service model and growth strategies are resonating as execution has stabilized. Net sales increased almost 3% year-over-year with pricing realization and favorable currency largely offsetting North America volume declines. As operations stabilized in North America, customer activity and fulfillment improved meaningfully in February and March, consistent with our expectations following the January inventory shutdown. As anticipated, gross margins were pressured in the first quarter, driven by incremental labor, freight and expediting costs associated with ERP recovery efforts earlier in the period. Importantly, margins improved sequentially each month as execution and throughput strengthened. The gross margin exit rate on an enterprise level was approximately 40%, and this supports our confidence for continued gross margin recovery as the year progresses. The gross margin improvement flowed through to EBITDA and reflects improving operational momentum. Fay will further walk through the details and outlook in her remarks. Next, let me spend a few minutes on our ERP recovery, which was the central operational focus of the quarter in North America. Our top priority entering 2026 was to stabilize our North America operations, restore reliability for our customers and reestablish a solid operating foundation following the ERP go-live disruption. The actions we took in the first quarter were deliberate and aligned with that goal and are reflected in the operating performance I just highlighted. By the end of the quarter, core workflows, including order management, production scheduling and fulfillment, were stable and operating at scale. Stabilization was the first phase, not the end state. With the system operating reliably at scale, our focus has shifted from fixing functionality to driving efficiency and optimization. The work underway today is centered on addressing the friction points identified during the stabilization phase, phasing out remaining manual workarounds and strengthening end-to-end execution across the business. As we move through the second quarter, the emphasis is on improving throughput, labor productivity and system-enabled performance. These efforts are already underway and the steady improvement we saw through the first quarter, including a stronger exit rate in March, supports our confidence in continued efficiency gains and gross margin recovery in the second half of the year. The lessons learned from our North America ERP implementation are informing how we approach the remaining phases in EMEA, which were originally scheduled for early 2026. We have intentionally pushed the EMEA implementation beyond 2026, allowing the organization to remain fully focused on recovering North America execution before advancing to the next phase. As our plans continue to evolve, we will keep you updated on timing and expected costs as we gain greater clarity. I want to thank our customers for their continued partnership and patience as we work through this transition. I also want to recognize the extraordinary effort of our employees across the entire organization. This was truly a company-wide effort with teams working together every day to support our customers and restore reliable execution. The dedication of our people and the strength of our customer relationships are 2 of the reasons I remain confident in the path ahead. I now want to provide an update on the exciting progress we are driving in our robotics business. Since 2018, we have earned the trust of the largest, most forward-looking flagship customers globally. We have shipped over 11,500 robots cumulatively. We have built a growing and profitable U.S.-based robotics business and established ourselves as a world leader, driving the robotic cleaning disruption. I'm proud of what we've built, but I also believe we're just getting started. The signals from the market today are clear. We are seeing double-digit market growth rates and increasing demand from customers across vertical markets around the world who are serious about adopting robotics. In Q1, our AMR sales, inclusive of equipment and autonomy service fees, were approximately $27 million, representing 9% of total net sales in the quarter and 85% year-over-year robotics growth. We see the inflection point in customer interest, and we are acting decisively to capture near-term growth and drive this market towards the tipping point in adoption. More specifically, I would like to highlight 5 key activities this quarter. First, we are ramping our TNC robotics venture by hiring and onboarding new roles and activating our growth strategies. We're operating with the speed and urgency of an entrepreneurial start-up to accelerate AMR growth by leveraging the full power of our $1.2 billion global core business. Our proven product portfolio, preferred brands, extensive channel reach, 4,000-plus employees, including 1,000 field service technicians, position us to drive a winning disruption of our own core industry over the long term. Second, we delivered another defining milestone by extending our exclusivity arrangement with Brain Corp until 2029 with an evergreen notice period. This preserves Tennant's exclusive access to the BrainOS autonomy platform in our category, strengthens our partnership alignment and reinforces our clear division of responsibilities. Leveraging the strengths of each partner, Tennant owns the customer relationship, equipment design, direct sales, service and life cycle support, while Brain Corp advances the foundational AI, spatial intelligence and software that power our portfolio. With exclusivity secured, we have the conviction to invest aggressively, and we plan to bring 10 new AMR products to market over the next 24 months. This is the power of 2 global leaders joining forces to aggressively drive tangible results. Third, the strength of this partnership was demonstrated with the launch of BrainOS Clean 2.0 and SelfPath AI. SelfPath enables advanced autonomous navigation, allowing machines to independently generate and continuously adapt cleaning routes in real time, eliminating the need for manual route training and retraining. This increases customer adoption, improves deployment efficiency and optimizes performance in the real-world applications. Together, these capabilities represent platform-level innovation and a compelling example of physical AI delivering measurable value in dynamic commercial environments. Fourth, we significantly expanded our addressable market with 2 strategic product launches. The X16 SWEEP, our first robotic sweeper, is an industrial-grade machine built for rugged, reliable performance in demanding warehousing, logistics and manufacturing environments. This launch is another growth catalyst. Sweeping is a broad-based need across nearly every industrial vertical. And because pre-sweeping is required before scrubbing in most cases, the X16 expands our robotics portfolio from best-in-class scrubbing to adjacent sweeping use cases. Our customers made an industrial robotic sweeper a clear priority. The X16 SWEEP meets their needs and early demand signals are very strong. We also introduced the X2 ROVR, our small format scrubber that brings superior cleaning performance, ease of use, competitive value proposition and unmatched maneuverability through robotic cleaning of small shared spaces in retail, grocery, schools, convenience stores, and the tight spaces inside larger facilities that bigger machines simply cannot reach. This positions us to further expand our addressable market and capture share in this high-growth segment. Together, the X16 SWEEP and X2 ROVR extend our robotic cleaning benefits to more customers, more verticals and more applications, accelerating our growth trajectory and reinforcing our leadership position in robotics. Fifth, we are aggressively expanding our channels to market for Tennant robotics. We are launching new products, programs and compelling offerings specifically designed to accelerate adoption with building service contractors and grow with our distributor partners worldwide, making it simpler and more rewarding for them to promote our robotic solutions. Our new X2 ROVR is tailor-made for these channels and their end customers in vertical markets like retail, grocery, schools and convenience stores, customers they already support every day. And we're not building this from scratch. Tennant already has deep established relationships with BSCs and distributors across the globe. One thing that truly differentiates us and is highly valued by building service contractors is our unmatched support ecosystem, over 1,000 factory direct service technicians worldwide who can service and support our robots like no competitor can. That is a significant competitive advantage that gives our partners and their customers total confidence to adopt and scale with Tennant robotic cleaning. The global robotic cleaning market is dynamic, and we remain closely attuned to the competitive landscape. Our focus is on what we can control, the proven strength of our business, the entrepreneurial agility of our T&C venture and a robotic product portfolio that continues to expand. Our market coverage is broadening. Our partnership with Brain Corp is stronger than ever and the demand trajectory we are seeing reinforces our conviction. Taken together, these advantages give me real confidence and genuine excitement in delivering our target of $250 million in AMR revenue by 2028. Turning to the remainder of 2026. Our first quarter performance, strong order momentum and continued ERP progress support our confidence in the full year plan, and we are reaffirming our 2026 guidance. Before I turn the call over to Fay, I want to briefly frame how we think about capital allocation more broadly because it is a core part of how we create long-term value. Our capital allocation framework is straightforward. We invest first in the business to drive durable, profitable growth. We maintain a strong balance sheet and ample liquidity. We pursue strategic M&A opportunities that enhance our portfolio, and we return excess capital to shareholders. Strong execution and disciplined working capital management have supported solid free cash flow and the flexibility to advance our priorities. While operating cash flow has been temporarily impacted by the ERP disruption, we expect that impact to be transitory, and our overall free cash flow profile continues to support both growth and shareholder returns. We prioritize organic growth investments, particularly in R&D and operational improvements that strengthen our competitive position and enhance long-term returns. On average, we invest around 3% to 3.5% of sales in R&D and spend between $20 million and $25 million annually on CapEx, and we expect these levels to continue in the near term. We also manage liquidity and leverage with discipline so we can navigate market conditions and act decisively when opportunities arise. We remain within our stated leverage target of 1 to 2x adjusted EBITDA, and we intend to keep our balance sheet position to support both shareholder returns and strategic growth, including M&A. Returning capital to shareholders remains central to our capital allocation strategy. We intend to continue our long record of disciplined competitive dividend growth, and we also repurchase shares opportunistically when we believe the return profile is compelling. In the first quarter of 2026, we accelerated buybacks amid an event-driven dislocation in our share price that we believe was tied to the ERP implementation and not reflective of our core performance. We deployed $60 million to repurchase approximately 950,000 shares or 5% of beginning of year shares outstanding at an average price of $63 per share, an intentional high conviction decision we believe represents an attractive return for shareholders and is fully aligned with our stated capital allocation priorities. To execute this opportunity, we utilized a portion of our borrowing capacity, which increased leverage, but we remain within our targeted leverage range of 1 to 2x adjusted EBITDA. Importantly, we expect leverage to trend back toward the lower end of that range by the end of 2026, and this action does not preclude us from continuing to invest in organic growth or pursuing other strategic initiatives, including M&A as opportunities arise. As a result of our share repurchasing activities, we expect an approximately $0.15 net positive impact on EPS on a full-year basis. Reflecting our continued confidence in Tennant's strategic direction and commitment to disciplined capital return, our Board recently authorized a new 2 million share repurchase program. Together with shares remaining under our existing authorization, this brings total repurchase capacity to approximately 2.56 million shares or roughly 15% of basic shares outstanding, providing meaningful flexibility to continue returning capital opportunistically. M&A remains an important lever within our framework. Recent tuck-in acquisitions of distributors in EMEA have strengthened our portfolio and expanded capabilities, and we continue to evaluate opportunities that meet our strategic and financial criteria. Taken together, these actions reflect a disciplined and balanced approach to capital allocation, investing to drive long-term growth, maintaining financial resilience, pursuing strategic opportunities and returning capital when we see an attractive risk-adjusted return. We believe this approach positions us well to create long-term value for shareholders. With that, I will turn the call over to Fay for a deeper discussion of the financials. Fay West: Thank you, Dave, and good morning, everyone. Before walking through the quarter, I want to briefly address the impact of the North America ERP implementation on our first quarter financial results. As Dave noted, operational performance improved meaningfully as the quarter progressed. However, we estimate that the ERP disruption reduced first quarter net sales by approximately $23 million and gross margin by approximately $17 million. Of the lost sales, roughly 1/3 relates to parts and consumables and service, which we do not expect to recover. The remaining 2/3 relates to equipment, which we believe we can recover within the year. The net sales impact was driven primarily by a 2-week manufacturing and distribution shutdown in January to complete a full physical inventory count. The gross margin impact is comprised of approximately $11 million due to the lost volume from the shutdown, and approximately $6 million from elevated labor, freight and expediting costs during the post-implementation ramp-up. With that context, I'll now turn to our first quarter financial performance. In the first quarter of 2026, Tennant reported GAAP net income of $0.2 million compared to $13.1 million in the prior year period. The year-over-year decline was driven by gross margin compression associated with ERP recovery efforts and shifting customer mix, coupled with higher operating and interest expense. Operating expenses increased year-over-year, driven by unfavorable foreign currency, legal and financial advisory costs, higher compensation and benefits, and increased software subscription fees. Interest expense net was $3.4 million compared to $2.3 million in the prior year period, reflecting higher average debt balances, including borrowings to fund share repurchases, partially offset by lower average interest rates. Income tax expense declined year-over-year, reflecting lower operating income. For the quarter, our effective tax rate increased to 80.5%, primarily driven by discrete tax costs related to share-based compensation as a percentage of pretax book income. This elevated rate in Q1 is largely due to timing, and we continue to expect our full year effective tax rate to be within our guidance range of 24% to 29%. Adjusted diluted EPS was $0.58 for the quarter, down from $1.12 in the prior year period, reflecting lower operating performance as just outlined. I'll now provide some additional color on our non-GAAP items for the quarter. ERP project spend totaled $8.8 million in the first quarter. This included $5.6 million of implementation expense that were reflected in S&A and $0.6 million of ERP amortization. The remaining $2.6 million of costs were capitalized. We also recorded $2.9 million of legal and financial advisory costs related to the cooperation agreement with Vision One and $0.8 million related to restructuring, legal contingency and acquisition integration costs. Let's now look at the quarter in more detail. Consolidated net sales totaled $297.9 million, up 2.7% year-over-year. On an organic and constant currency basis, sales declined 1.9%, driven primarily by lower North America volumes early in the quarter related to the 2-week plant shutdown in connection with the physical inventory count. As a reminder, we group our net sales into the following categories: equipment, parts and consumables, and service and other. In the first quarter, equipment sales increased by 3.1%, parts and consumables decreased by 4%, and service and other sales increased by 10.6%. Equipment growth reflected continued momentum in our commercial product portfolio, including strong contributions from recently launched models and our growing AMR product portfolio, along with continued strength in our distributor and strategic account channels. This was partially offset by lower industrial equipment volumes in North America tied to the ERP-related plant shutdown earlier in the quarter. Parts and consumables declined year-over-year with the shortfall driven primarily by North America, where the 2-week plant shutdown delayed parts shipments in the quarter. Outside of North America, underlying parts and consumables demand was resilient, benefiting from disciplined pricing realization and continued strength in our distributor channel. Service and other growth was driven primarily by increased autonomy subscription revenue associated with our AMR products. The core service business experienced growth in EMEA and Latin America as we continue to make progress filling open service routes, gaining productivity across our field service organization and benefiting from prior year pricing actions. The strength of service and other, reflects the durable recurring nature of these revenue streams and the underlying growth of our installed base, including our expanding AMR fleet. Shifting to regional performance. On an organic basis, performance across the regions was mixed. In the Americas, sales declined 3%, driven primarily by lower volumes in North America due to ERP impacts earlier in the quarter. This was partially offset by continued pricing realization, reflecting the benefit of tariff-related pricing actions implemented last May. Latin America delivered a strong quarter with net sales up 9% organically, driven by volume growth and favorable mix. We continue to see strong commercial execution in Brazil and Mexico, including the rollout of the T260 and the expansion of our rental and strategic account programs. EMEA grew 1% organically, reflecting our second consecutive quarter of volume growth in the region. Growth was supported by disciplined price realization and strong equipment sales in France and Germany, where volumes increased at a double-digit rate, highlighting the strength of our commercial execution and the resonance of our products. In APAC, organic sales declined 2%. Growth in India and Korea continued and Japan returned to modest growth, but these gains were more than offset by ongoing softness in China due to excess manufacturing capacity and pricing pressure in mid-tier product categories as well as softer demand and project timing in Australia and parts of Southeast Asia. Gross margin in the first quarter was 38.1%, a 330 basis point decline compared to the first quarter of 2025. Sequentially, margin improved 350 basis points from the fourth quarter of 2025. Approximately 3/4 of the year-over-year decline was driven by incremental labor, freight and expediting costs associated with our ERP recovery efforts. The remaining 1/4 came from a shift in customer mix towards strategic accounts, which carry a different margin profile. Tariff and other inflationary pressures were fully offset by price realization and cost-out initiatives. Adjusted S&A expense for the first quarter was $88.2 million compared to $83.2 million in the prior year period. The increase was driven primarily by unfavorable foreign currency of approximately $3.4 million, higher compensation and benefits and higher software subscription and license fees. As a percentage of net sales, adjusted S&A was 29.6% compared with 28.7% in the prior year period, reflecting deleverage from these cost increases. Adjusted EBITDA for the first quarter of 2026 was $29.1 million or 9.8% of net sales compared to $41 million or 14.1% in the prior year period. The year-over-year decline primarily reflects gross margin compression, coupled with deleverage in S&A expense. Turning now to capital deployment. In the first quarter of 2026, Tennant used $31.2 million of cash for operating activities compared to $0.4 million of cash in the prior year period. The year-over-year decline in operating cash flow reflects 3 primary factors. First, lower operating performance in the quarter. Second, an increase in accounts receivable, driven in part by the timing of collections as receivables built in the first quarter from the strong shipment activity in March, while collections in the period reflected the lower shipment volumes from the fourth quarter of 2025. And third, a build in inventory and other working capital movements as we ramped production to serve demand. We expect operating cash flow to improve meaningfully through the balance of the year as receivables normalize, inventory levels rebalance and operating performance strengthens in line with the sequential improvement we are guiding to. We continue to view the first quarter dynamic as transitory and remain confident in our underlying free cash flow profile for the year. Liquidity remains strong. We ended the quarter with $82.6 million in cash and cash equivalents, and approximately $289 million of unused borrowing capacity under our revolving credit facility. We ended the quarter with a net leverage ratio of 1.78x trailing 12-month adjusted EBITDA, maintaining a strong balance sheet and financial flexibility. Moving now to our 2026 guidance. Based on our first quarter performance and the momentum exiting the quarter, we are reaffirming our full year 2026 guidance. Specifically, we continue to expect net sales in the range of $1.24 billion to $1.28 billion, reflecting organic sales growth of 3% to 6.5%. Adjusted EBITDA in the range of $175 million to $190 million, representing an adjusted EBITDA margin between 14.1% and 14.8%. GAAP diluted EPS of $4.05 to $4.65, and adjusted diluted EPS of $4.70 to $5.30, which excludes ERP modernization costs and amortization expense. Capital expenditures of approximately $25 million and an adjusted effective tax rate between 24% and 29% also excluding ERP modernization costs and amortization expense. As we indicated on our last call, we continue to expect results to be weighted towards the second half of the year with sequential improvement in each quarter. The first quarter results are consistent with that framework. Gross margin is expected to expand progressively as we complete our ERP activities, realize the carryover benefits of our pricing actions and drive productivity and cost-out initiatives across our supply chain. We continue to actively manage the evolving tariff landscape and believe our pricing and cost-out actions position us well to navigate that environment within the guidance ranges we have provided. We are also monitoring the situation in the Middle East and its potential effects on freight and input costs. While we do not anticipate a material impact on demand, we have factored the potential cost implications into our outlook and believe our current guidance range appropriately reflects that risk. Our confidence in the full-year outlook is further supported by the strong order momentum and expanded backlog entering the second quarter, along with the continued acceleration of our AMR and robotics portfolio. While we recognize there is still work ahead, we are appropriately positioned to deliver on our full year commitments. With that, I'll turn it back to Dave. David Huml: Thank you, Fay. Before we move into the Q&A section, I want to close with a few simple messages. Our first quarter results reflect meaningful progress on the issues we discussed on our last call. We entered the year focused on stabilizing our North America operations, restoring service to our customers and delivering on the commitments we made to our shareholders. We are executing against all 3. At the same time, the underlying fundamentals of our business remain strong. Order momentum is robust and broad-based. Our international regions continue to execute well, and the momentum in our autonomous and robotics portfolio continues to build. Our balance sheet is healthy. Our capital allocation priorities are clear, and our teams are focused. I want to once again thank our employees for their resilience and dedication through a demanding period and our customers for their continued partnership. We remain confident in our path forward and in our ability to deliver on our 2026 outlook. With that, we'll open the call to questions. Operator, please go ahead. Operator: [Operator Instructions] And our first question comes from the line of Tom Hayes with ROTH Capital Partners. Thomas Hayes: Dave, maybe starting with a multipart question on the order environment, real solid results in the quarter. I was just wondering, one, was there maybe some catch-up on the order growth from Q4 when you guys sort of had some challenges? And then maybe could you talk about the order growth momentum for robotics within that order growth? David Huml: Yes. I'd be happy to, Tom. So your first question about was there any catch-up from Q4? We talked about growing some backlog as we exited Q4 in the $15 million range. And obviously, we serviced that in the quarter and added additional backlog as we came through Q1. So I don't think we can attribute much of the order volume in Q1 based to -- based on sort of carryover or catch-up from Q4. We have been working very closely with our customers, especially those that have been impacted in North America by the ERP transition, to make sure that we are servicing their demands and meeting their requirements as we strove to drive system stability, but then also support them through this period of ERP disruption. Robotics did contribute materially to our order demand. And I think it's worth noting that our robotics demand in Q1 is in large part due to the efforts of the entire company over the last 6 months to a year as we've been developing a very robust funnel of opportunity for robotics. Strong orders from robotics in the quarter. We referenced in the script, $27 million in robotic equipment sales, inclusive of the ARR from autonomy subscriptions, represents an 85% year-over-year increase, and robotics represented 9% of our enterprise sales in the quarter. And I think that we had a strong pipeline. I think we began to capitalize on that pipeline. We articulated in the script really 4 to 5 really key actions we've taken in the quarter in standing up our TNC robotics venture, launching 2 new exciting products in the X16 SWEEP, which starts shipping in Q2 and the X2 ROVR, which starts shipping in Q3. We solidified our exclusivity agreement with Brain Corp through 2029, which really allows us to focus on those areas that we are both strongest at, and aligns us towards the singular goal of driving unit volume growth and tipping -- driving towards a tipping point of adoption in robotic cleaning equipment. So I think we've got a number of specific actions that we've taken in the quarter to help drive demand not only in the quarter, but also as we proceed through the year. Thomas Hayes: I appreciate the color. Maybe a little bit on Brain Corp. And then I think one of the things that I thought was interesting was I'd like to get your thoughts on how it kind of continues to differentiate you from the competitors. Just the new release of the BrainOS, that seemed to be kind of a big deal. I just want to get your thoughts on that. David Huml: Yes. It's a really big deal, and it's really the next evolution of our partnership with Brain and the operating system that is embedded in our market-leading robots. We released Clean 2.0, which is really the next-generation navigation autonomy software. And within that Clean 2.0 platform, we specifically introduced SelfPath AI. And when you think about the SelfPath AI feature, software, what allows the robots to do is really self-train themselves, self-train the cleaning paths within their environment. So it has dynamic self-training of the cleaning paths within an environment. So as opposed to teach and repeat where we showed the robot where to go and it would reliably repeat that specific path. These robots with SelfPath AI embedded on the machine actually learn the entire store, the entire environment and optimize the cleaning paths within that environment. It's a big difference. And the customers notice the difference in the performance on the ground. Another benefit of SelfPath AI is faster deployment, because we don't have to trace every square inch of the facility to show the robot where to clean, we can just go through the major pockets of floor, it can learn the space. We can greatly reduce the deployment time that it takes to deploy a new robot. I'm talking about like a greater than 50% reduction in time, which makes it easier and faster for us to deploy robots at scale as well as for our customer, if they change their store layout or if they want to train it themselves, retrain it themselves, they can do it much more quickly than they could before. I think the other key point I would talk about on SelfPath AI is around obstacle detection. Our older operating system was great at obstacle detection. With SelfPath AI, we moved from detection to identification. So now we don't -- the robot knows not only is the path blocked, but what is -- what the path is blocked by, whether it's a human or its box of inventory or it's a forklift in industrial applications. And then it makes real-time decisions on the floor in front of the object depending on what gets identified, whether it should slow down, it should pause, it should wait or should just leave and return later to that path. So it's much smarter about not just detecting obstacles, but identifying what the obstacle is and responding accordingly. So we think all in, this Clean 2.0 is really the next generation sets us apart from competition and especially those that have had any exposure to our robots in the past are going to see a marked difference in performance in real-world applications. And really sets us up to continue to drive not only our existing X4, X6 Series product, but now the new X16, X2 and more new products to come. All in, the SelfPath AI and Clean 2.0, the new product launches, the TNC robotics, the new amendment with Brain really gives me confidence that we can deliver the $250 million in AMR revenue by 2028. Thomas Hayes: I appreciate the color. And maybe just one last one on the margin outlook. And maybe I missed the details. Did you indicate you put in pricing actions so far? And if so, when? And can you quantify the size of those price actions? David Huml: Yes. Let me dimensionalize price as a contributor to our margins. And then Fay, you can put some color on sort of the margin trending in the quarter, if you'd like. We did an annual list price increase like we normally do at the beginning of a calendar year. And though we sell those in, we did great realization on that. That was a global effort. I think the -- in addition to that, what you're seeing bleed through in North America is an incremental impact from pricing action we took in May of 2025, which was tariff-driven. If you recall what was going on in the market back then, tariffs were layering post-Liberation Day. So now we're lapping a quarter that did not have that tariff-driven price increase benefit in 2025, and we're bleeding that through in our Q1 2026 results. Fay West: Yes. And if you just look at Q1, Q1 gross margin was 38.1%, which was 350 basis points better sequentially than Q4 of 2025. We exited March at approximately 40% at the enterprise level. And so we expect gross margin to expand as we go throughout the year and we complete our optimization in the second quarter, and continue to realize those pricing benefits that Dave just recognized as well as continue to capture cost-out activities and productivity initiatives. So this implies that the second half gross margin embedded in our full-year guidance will be in the low 40s, which is consistent with our long-term framework with Q2 stepping up sequentially from Q1 as the optimization work progresses and as some of those period expenses that I identified in our -- in my prepared remarks no longer carry through to Q2. Operator: And our next question comes from the line of Steve Ferazani with Sidoti. Steve Ferazani: Appreciate all the detail on the call. Certainly, a lot of numbers and I just want to make sure I'm thinking about this right. And I do want to follow up with the final responses to the last question, just in terms of your expense and gross margin. So you said you exited the quarter, which is [Technical Difficulty]. Fay West: We did [Technical Difficulty] related to just decreases. And so we saw improvement in margin from January, February to March. And on the enterprise level, we exited at roughly 40%. But when you look at margin year-over-year and the 350 basis point increase that we outlined, approximately 3/4 of that decline was related to, I'll just say, ERP recovery efforts that I just highlighted. The remaining 1/4 is really a shift in customer mix towards strategic accounts, as you mentioned, and also just a mix between -- mix away from industrial, when we look year-over-year. We do believe that tariff and other inflationary pressures that we recognized in the quarter were really offset by price realization and cost-out activities. Steve Ferazani: Got it. And so when I think about what you believe the long-term gross margin should look like because over the last couple of years, obviously you had the backlog pick up and then that normalized. So it's harder to kind of figure out what do you think a normalized Tennant gross margin on an annual basis should look like, and that may change over the years. But how do you think of that right now? Fay West: Yes. I think it's going to change within quarters, mix and other things do impact that. But I would say roughly 42% is kind of a gross margin target. And we've been there, Steve. I mean when you look at how we exited Q3 of last year and performance in other quarters, we think that that's a good range. Certainly, we'll strive to make that higher as we look to expand our margins, and we do believe that we are investing in our business to differentially take cost out, and to optimize our operations and still remain price disciplined. So I think 43% is a good level, but we will always look to see how we could improve upon that. Steve Ferazani: Of course. As we've gotten into earnings season, we've had a lot of companies raise top line, but not raise EPS primarily because of incoming inflationary pressures, which some expect may get worse. How are you thinking about that? Fay West: So when we -- so there's certainly a couple of macro headwinds that we are facing along with all other companies, and that is including kind of increased costs related to what's happening in the Middle East, if you think about potential kind of increase in freight charges and other costs. We've baked that in and think that it's not going to be very material at this point. We'll see how the landscape evolves. But we think that we're covered within our guidance range, certainly from an EBITDA margin perspective, to absorb those costs. And so I think that we've got enough flexibility that we could absorb that within our guidance range. Steve Ferazani: Got it. And when I think about your guidance range, given the significant share repurchase, which I'm guessing wasn't in there to begin the year. I mean, if I looked at it, if you hit the midpoint of all your other guidance that went unchanged, that puts your EPS at the upper level. David Huml: Correct. Yes, that's fair. I think we mentioned during the prepared remarks, Steve, that we expect roughly $0.15 coming from the net impact of share repurchase. Remember, we do some debt. So there's a positive accretive effect of share repurchase based on additional interest expenses, but that $0.15 gets covered within the range. Steve Ferazani: Got it. That's helpful. If I could get one more in. Dave, when you talked about the new Brain agreement, the extension of 3 years, you mentioned an evergreen notice. Can you explain that? David Huml: Yes. So typical in arrangements like this, rather than having to redraft an entire agreement every 2 or 3 years, we built in an evergreen -- I'll call an evergreen clause, and I'm not a lawyer, but I'll just tell you how it works. We kind of mutually agreed that if this is still working for both parties, then we would continue as is without having to redraft and renegotiate an entire agreement. And there's a notice period. The notice period really just gives us each an opportunity, if we were to assess this arrangement and decide that we wanted to exit in some period, it gives us each a lead time to prepare for that exit. So nobody can sort of -- neither party can kind of leave in the dark of night without letting the other one know about it. Where we would then align around ongoing support going forward. It's a lengthy notice period that gives us each plenty of time to adjust our business accordingly. So I think it's pretty standard in agreements of this type, and it really just reduces or eliminates the need to renegotiate entire agreement or contract over time. I think the fact that we got to this exclusivity extension to 2029, and an evergreen clause with the notice period, these are signals that the partnership is really strong, that we're both aligned and committed and motivated to go out and drive this disruption in this cleaning robotics business. Steve Ferazani: And where are you now with -- I think you noted when you formed the robotics group, the importance of channel expansion. Can you talk about your progress there? David Huml: Yes. We're making great progress. And so I think if you look back at our history, we've done really well integrating robotics in with our strategic accounts, for example, channels and direct channels as well where we sell on direct basis, whether it be strategic account commercial customers or industrial customers. Where we're starting to lean in more heavily is, and I mentioned it on the prepared remarks in the script, we're leaning in more heavily to building service contractors and our distribution channels. Let me put a little color on that. Building service contractors, their business is largely based on labor, right, and cleaning labor. And so it's been challenging for them to consider how to integrate robotics into their offering to their end customer in a profitable way, in a meaningful way, and adopt it in a way that delivers real value to their end-use customers. And so we've been -- we've had some success with building service contractors, some of them more forward-thinking and progressive, but they've kind of had to figure it out along the way. We think that the demand for robotics and building service contractors is accelerating. And we think with some of our new product launches and the feature sets of our new products as well as our support ecosystem, we are better positioned than ever to go help building service contractors adopt robotics. At the same token, our distribution channel, we have sold robots through our distributor partners. And we have a vast distribution network around the globe, 35% of our revenue goes through distributor partners. We just haven't fully cracked the code on how to leverage that channel to grow robotics differentially. And so one of the actions that the TNC robotics venture leads into was working with our distributor partners to understand what would it take to accelerate robotics adoption through a distribution channel. It's partially a product solution. You got to have the right product that fits that channel, the ease of moving the product and setting the product up, to successfully deploying, as well as a price point and a value proposition that's going to meet the type of customer that most distributors call on, because they want to sell something as a complementary product to customers that already service and support. There's also a pricing component. Any time you're 2-stepping product to market, you've got to build in room for your channel partner to participate and drive some acceptable profitability. And there's an aftermarket service component. If our distributors offer direct service themselves, we've got to be able to train and equip them to service the robots. And if they don't offer direct service, they need to rely on Tennant service. We need to have the ability for the distributor to sell the service contract that we then honor with the end-use customers. So there's some interesting opportunities that we had to design our products and our programs and our value proposition to make sure that we have a winning pitch when we more fully engage our distribution channel. When you look at the products we're launching, the work we've done around our value prop, the aftermarket support, I think we are going to make meaningful progress in 2026, penetrating that existing channel and maybe earning some new distribution partners as well with our robotics platform. Operator: [Operator Instructions] And our next question comes from the line of Aaron Reed with Northcoast Research. Aaron Reed: Just a couple of questions here. So on demand, so orders grew 10% in the first quarter with backlog building at $32 million. Help me think about this, how much of that order strength is underlying demand versus customers placing orders earlier because of the earlier lead times? And just a quick little follow-on to that. How should we think about the conversion of the backlog through the balance of the year? David Huml: Yes. So really proud of the results we delivered. I'm going to stick on orders for a minute. 10% order growth is really a great way to start the year. That's our highest quarter since Q1 -- first quarter since Q1 of 2022. And so for this business, it's a really strong start to the year, $327 million enterprise-wide. There is some of that order book, and some of the backlog is future orders out of the period. I'm estimating around 1/3 -- 1/3 of it is customers that gave us an order because they know they want the product in Q2 or Q3 of this year. It's large strategic accounts who are planning for large store deployments across multiple stores, and they want to make sure that they've got the production slot paced to their rollout schedule. So that's really just the customer planning their business. It's not induced by our performance, our output from the plants, our ERP challenges or anything that we're doing. The rest of the order volume that we saw is really customer demands turned on for our products and our services. And so I think it's real and it's durable. And then we can point at the specific growth strategies we've invested in to drive that order volume in the quarter. Aaron Reed: Super helpful. And then the second follow-up question here is switching gears on capital allocation. So you repurchased about 5% of shares outstanding in the first quarter. So at an average price, I think I thought it was at $63 or around there. And the Board just authorized an additional $2 million for additional or 2 million share repurchase. Where are you on leverage in the ERP recovery? And how should we think about the appetite for any further share buyback versus M&A through the rest of the year? Fay West: So Aaron, I think when you think about the Q1 activity and the buyback, we really view that as an opportunistic really high conviction decision that was in response to what we think was an event-driven dislocation in our share price, following the ERP disruption. It was not reflective, we believe, of the underlying value of Tennant. Going forward, repurchases will continue to be opportunistic. As you mentioned, we have ample authorization, including the $2 million increase that was just provided by the Board, share authorization. And we will continue to deploy capital where we think that there is an attractive return. We continue to invest in our business. We'll continue to pay dividends and we'll continue to pursue M&A, and that's all in line with our capital allocation framework that Dave spent time discussing earlier in the call. We did end the quarter with net leverage of about 1.78x trailing 12-month adjusted EBITDA, which is within our targeted range of 1 to 2x. And so we're comfortable at that level. We have strong liquidity with about $290 million of unused borrowing capacity under our revolver and cash of roughly $83 million on the balance sheet, which gives us meaningful liquidity and flexibility. And so we do have room for additional opportunistic activity, but our framework prioritizes maintaining flexibility and also looking at other options within our framework as we've outlined. Operator: And since there are no further questions at this time, I would like to turn the call back over to management for closing remarks. David Huml: Okay. Thank you for your time today and your continued interest in Tennant Company. This concludes our Q1 earnings call. Hope you have a great day. Operator: Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the Curaleaf Holdings, Inc. First Quarter 2026 Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I would like to turn the floor over to Camilo Lyon, Chief Investment Officer. Sir, please go ahead. Camilo Russi Lyon: Good afternoon, everyone, and welcome to Curaleaf Holdings First Quarter 2026 Conference Call. Today I'm joined by Chairman and Chief Executive Officer, Boris Jordan; President, Rahul Pinto; and Chief Financial Officer, Ed Kremer. Before we begin, I'd like to remind everyone that the comments on today's call will include forward-looking statements within the meaning of Canadian and United States securities laws, which, by their nature, involve estimates, projections, plans, goals, forecasts, and assumptions, including the successful integration of acquisitions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements on certain material factors or assumptions that were applied in drawing a conclusion or making a forecast in such statements. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in the company's filings and press releases on SEDAR and EDGAR. During today's conference call, in order to provide greater transparency regarding Curaleaf's operating performance, we will refer to certain non-GAAP financial measures and non-GAAP financial ratios that involve adjustments to GAAP results. Such non-GAAP measures and ratios do not have a standardized meaning under U.S. GAAP. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by U.S. GAAP, should not be considered measures of Curaleaf's liquidity, and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable U.S. GAAP financial measure under the heading Reconciliation of non-GAAP Financial Measures in our earnings press release issued today and available on our Investor Relations website at ir.curaleaf.com. With that, I'll turn the call over to Chairman and CEO, Boris Jordan. Boris? Boris Jordan: Thank you, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our first quarter results. 2026 is off to a strong start across macro, fundamental, and regulatory landscapes. And more importantly, we are seeing a clear shift in the trajectory of our business and the industry. The macro headwinds that constrained growth over the past 3 years are now beginning to turn into meaningful tailwinds. In the U.S., consumer spending remained healthy in the first quarter. However, we are closely monitoring current inflationary pressures. Stronger income tax refunds versus last year have supported spending power to the benefit of robust cannabis sales, reinforcing the resilience of underlying demand even in the face of higher gas prices. At the same time, we believe the anticipated hemp ban is already benefiting the regulated market. Alcohol retailers have begun destocking hemp-derived products, and we expect that trend to accelerate as we approach the November 11 hemp ban implementation deadline, driving consumers back into the regulated channel, increasing traffic, and further strengthening the position of skilled operators like Curaleaf. From a fundamental standpoint, our strategy is delivering. The investments we've made in the core pillars of our Built for Growth framework, customer centricity, brand building and operational excellence are translating directly into tangible P&L performance. First quarter revenue of $324 million grew 6% year-over-year, exceeding both our guidance and internal expectations. Our domestic and international segments grew 2% and 35%, respectively, underscoring the durability of our core business and the strength and scalability of our global platform. Without question, Curaleaf International is a key differentiator and an increasingly important driver of long-term value. Gross margin was 49% and adjusted EBITDA was $63 million or 20% margin, including a 170 basis point drag from our international as we continue to invest in driving growth and market share gains abroad. We ended the quarter with $106 million in cash on the balance sheet. Net income from continuing operations was $70 million or $0.09 per share compared to a net loss of $50 million or $0.09 per share last year. We also continued to strengthen our balance sheet. We reduced our acquisition-related debt by $9 million and successfully refinanced our $475 million senior secured note with an oversubscribed $500 million 3-year facility backed by strong demand from both new and existing investors. This transaction is a clear signal of investor confidence in our strategy, execution, and credit profile. Additionally, we completed the buyout of the remaining 45% minority interest in our German subsidiary, Four 20 Pharma, bringing our ownership of Curaleaf International to 100%. Based on a recent comparable public market transaction, the implied value of Curaleaf International is approximately $1 billion, highlighting the significant embedded value within our global platform that we believe is not yet fully reflected in our current valuation. The U.S. cannabis industry has now entered what we believe is the most important regulatory inflection point in 55 years. Two weeks ago, under the direction of President Trump, Acting Attorney General Todd Blanche, formally rescheduled medical cannabis from Schedule I to Schedule III, while simultaneously restarting the broader rescheduling process with an ALJ hearing set to commence on the June 29 and conclude no later than July 15. This dual-track approach is deliberate, designed to move with urgency while ensuring a durable and legally sound outcome. The practical and financial implications are highly transformative to the industry. First, federal funding for medical research will be allowed. Our U.K. team has been conducting research in concert with Imperial College in London on cannabis-derived solutions for neuropathic pain. We plan to share this research with the DEA and FDA while also leveraging our partnership with the University of Pennsylvania, whose cannabis research we also support under our special research license. Access to cannabis research should shed light on the medicinal properties of the plant and further remove the stigma that cannabis carries. Second, the removal of 280 taxation on medical cannabis expected to be retroactive to at least January 1st, immediately unlocks meaningful balance sheet benefits. 60% of Curaleaf's business is medical and stands to get substantial 280E relief. When the adult-use process concludes, which we expect later this summer, these benefits should extend across the adult-use portion of our business as well. The remaining open question relates to the IRS look-back period for retroactive 280E relief, and we expect further clarity in due course. Equally important, the DOJ's order opens an unexpected step that reforms medical cannabis beyond Schedule III. The order provides that we can get DEA licenses for our medical cannabis businesses, which would make our business fully legal under the CSA. In fact, earlier today, we filed applications to register with the DEA. Proceeds from the CSA cannabis cannot be deemed money laundering. The practical implications of this are yet to be seen, but we and the industry are racing to explore increased access to banking, financial services, and credit card use for our medical cannabis business. Normalized banking relationships and, critically, the ability to accept major credit cards would remove friction at the point of sale, improve conversion, lower transaction costs, continuing the normalization of the consumer experience. It would also improve cash management and expand access to credit, representing another meaningful step change in profitability and scalability for Curaleaf. Our adult-use business may also benefit from increased access to financial services when the expected adult-use rescheduling happens later this year. Furthermore, after adult-use rescheduling, the probability of uplifting to a major exchange meaningfully increases once guidance from treasury is provided later this year. With the glass ceiling now broken, we are seeing increased momentum at the state level as non-cannabis states, including North Carolina, South Carolina, Tennessee, and Indiana are actively exploring medical programs. Importantly, the upside here goes well beyond tax relief and banking access. The DOJ framework introduces a catalyst from which Curaleaf is particularly well-positioned to gain. The issuance of DEA licenses to state legal cannabis operators makes them compliant providers of cannabis under the CSA and the international treaty. This opens the door for us to participate in import and export transactions. A real import-export market will require permits from the DEA and many states have already indicated that they would support both exports and interstate commerce. For Curaleaf, this represents a significant and highly strategic opportunity. We already have built one of the largest and most sophisticated cultivation manufacturing footprints in the United States. This established network of facilities positions us to supply our international operations with domestically grown products dramatically improving margins and strengthening control over our supply chain. Today, we produce approximately 20% of our product we sell internationally. That leaves a substantial opportunity to vertically integrate, expand margins, and unlock incremental profitability at scale while further leveraging our existing domestic infrastructure. Interestingly, in the U.S., the mix has flipped. We produce approximately 80% of our own products and by 20% third-party products. Put simply, we believe we're uniquely positioned not just to benefit from the regulatory shift, but to lead the next phase of industry growth. Curaleaf International delivered a strong start to the year with revenue growing 35% year-over-year, ahead of our internal expectations. Performance was led by continued momentum in Germany and the U.K. with early signs of recovery in Poland. In Germany, after a soft January, reflecting accelerated pharmacy stocking late last year, sales rebuilt through the quarter and March was our strongest month, a positive setup heading into quarter 2. In the U.K., consistent with patient growth at Curaleaf Clinic more than offset competitive pricing dynamics and patient fees. Margins were pressured this quarter as we worked through transitional dynamics in our international supply chain. Prior to the recent U.S. rescheduling developments, we had been evaluating meaningful CapEx to expand our international cultivation footprint. We are now reassessing that investment in light of a more compelling alternative, leveraging our domestic cultivation assets and award-winning U.S. genetics to supply international markets. We would not only avoid significant CapEx, but also unlock meaningful gross margin expansion as we scale. Looking ahead, we remain optimistic that Spain, France, and Turkey will begin contributing in 2027 as those programs finalize their frameworks. And importantly, U.S. rescheduling could act as a catalyst for other countries to embrace medical cannabis. We're actively monitoring each market, and we'll share more as visibility increases. With that, I'd like to hand the call over to our President, Rahul Pinto, to discuss our U.S. strategy and operations. Rahul has been with us for nearly a year, bringing his CPG experience from Pepsi and Albertsons to Curaleaf and has already made impact on the business. Rahul? Rahul Pinto: Thank you, Boris. Our domestic business grew 2% year-over-year. And more importantly, we are seeing clear proof points that our strategy is working. The 3 pillars of our Built for Growth framework, customer centricity, operational excellence and brand building are coming together to create a durable and scalable foundation for growth. We saw the clearest early success in Florida, where we implemented the strategy first. By improving flower quality and strain diversity, introducing new products, aligning assortment with demand and delivering a seamless customer experience, we drove 15% transaction growth year-over-year, more than offsetting price compression. We have now taken this playbook and are deploying it across other key markets, including Utah, Ohio, and Pennsylvania, with similarly encouraging early results. Ultimately, our entire network of states will benefit from these actions. Let's discuss the pillars of our Build for Growth strategy, beginning with the first, customer centricity. Our R&D efforts have always started with a deep understanding of our consumer, and that focus continues to drive meaningful insights and innovation. Briq 2, which launched in March, is a clear example, addressing key consumer pain points like clogging while enhancing the overall experience through flavor protection technology and meter mode intelligence, providing a measurable draw each time. Soon, the flavor series and legacy series of Briq 2 strains will be complemented by the live series consisting of live resin and rosin to round out the portfolio. Similarly, the launch of Dark Heart last month establishes a new benchmark in ultra-premium flower. With best-in-class genetics, limited drops, and disciplined distribution, the brand is driving strong full price sell-through and reestablishing Curaleaf as a leader in the premium segment. Second is operational excellence, which speaks to delivering consistent improvements across our business as we've seen in our cultivation facilities and more recently, in our retail store experience. By matching retail assortments with customer demand and optimizing pricing, we are driving steady gains in key metrics such as traffic and units per transaction. These incremental improvements are compounding into meaningful financial performance. Third is brand building, which is critical to long-term staying power as the market evolves. In Select, we've simplified the product architecture to clearly communicate its value proposition, and we're seeing positive consumer reception that will add to its market-leading position. We are also investing in trade marketing, elevated visual merchandising in partner doors with encouraging results as domestic wholesale grew 19% this quarter. At the same time, we're expanding distribution with a disciplined focus on profitable growth. For example, last month's takeover of the travel agency in New York showcased our brands across both physical and digital channels, delivering outstanding results by significantly increasing traffic and AOV, benefiting both Curaleaf and the travel agency. As the industry scales, we believe leading brands will capture disproportionate share. Today, according to Hoodie Analytics, the Curaleaf portfolio holds a top share position with Select maintaining the #1 position in vapes, and we see substantial opportunity to expand on that leadership. When these 3 strategic pillars come together, they create a powerful flywheel, driving repeatable revenue growth, margin expansion, and increasing returns over time. I'll close by recognizing that these results and the opportunity ahead are a direct reflection of the execution, discipline, and commitment of our over 5,000 member team across the organization. As we look forward, we believe the 3-year down cycle the cannabis industry has navigated is now turning upward. The combination of improving fundamentals, accelerating regulatory momentum, and our scaled global platform positions us exceptionally well for what comes next. We thank President Trump for delivering on his commitments, turning promises into tangible results. Promises made, promises kept. Alongside acting AG Blanche, he achieved what others had started but weren't able to complete. As a result, patients, consumers, Curaleaf, and the burgeoning cannabis industry are meaningfully better today. With that, I'll turn the call over to our CFO, Ed Kremer. Ed? Edward Kremer: Thank you, Rahul. Total revenue for the first quarter was $324 million, a 3% sequential decline compared to the fourth quarter due to normal seasonality and increased 6% compared to the same period last year. Strength in Ohio, Curaleaf International, New York, Utah, and Massachusetts was offset by challenges in Nevada and Illinois. By geography, our domestic segment grew 2% year-over-year with retail contracting 2%, which was more than offset by 19% year-over-year growth in domestic wholesale. International revenue grew 35% year-over-year, beating our internal plan, driven primarily by Germany and the U.K. By channel, total revenue was $231 million, flat to the first quarter of 2025, while strength in wholesale increased 21% year-over-year to $90 million, representing 28% of total revenue. The growth in wholesale was driven by strong performance in New York, Massachusetts, Ohio, and solid growth in Curaleaf International. Our first quarter gross profit was $157 million, resulting in a 49% gross margin, a decrease of 220 basis points compared to the prior year period. The primary drivers of this contraction were price compression and discounts, partially offset by continued cultivation efficiency gains and disciplined labor expense controls. Our domestic gross margin was 50%, flat with the fourth quarter, underscoring the stabilization we're seeing in our U.S. business. While price compression remained present in most of our markets, we continue to find ways to offset that impact through cultivation efficiencies, product innovation, and selective price increases in states where demand is outstripping supply. Notably, we have recently begun to see the rate of price compression decelerate. International gross margin was 42%, a decrease of 190 basis points sequentially, driven by pricing pressure in our U.K. business and in German flower and lower service volume sales, which carry a higher margin. SG&A expenses were $113 million in the first quarter, an increase of $7 million from the year ago period. Core SG&A was $108 million, an increase of $5 million from the prior year. The year-over-year increase in our core SG&A primarily reflects international expansion, additional headcount, and new store openings in Florida and Ohio. Core SG&A was 33% of revenue in the first quarter, a 35 basis point decrease compared to the prior year due to leverage on stronger sales. First quarter adjusted EBITDA was $63 million, a decrease of 4% compared to last year, while adjusted EBITDA margin was 20%, inclusive of a 170 basis point drag from international, a decrease of 200 basis points versus last year. First quarter net income from continuing operations was $70 million or $0.09 per share compared to a net loss of $50 million or negative $0.09 per share in the year ago period. During the quarter, prior to the rescheduling news, we completed a routine tax review with external counsel based on new information that came to light in which we determined that certain tax positions in previous years met the more likely than not standard required under ASC 740. This conclusion allowed us to release a significant portion of our previously recorded tax reserves and accrued interest from our balance sheet. These positions will also reduce our uncertain tax position liabilities going forward. Separately, following the Treasury and IRS guidance on medical cannabis rescheduling, we expect to recognize additional 280E tax benefit in future periods. Now turning to our balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $106 million. Inventory increased $16 million or 7% compared to the fourth quarter due to planned inventory builds in anticipation of our breakthrough and Dark Heart launches, coupled with inventory stocking ahead of 4/20 holiday. Capital expenditures in the first quarter were $17 million. And for 2026, we continue to expect capital expenditures to be roughly $80 million. We generated first quarter operating free cash flow from continuing operations of $21 million and $4 million, respectively, largely due to the aforementioned inventory investments ahead of 2 product launches. We expect operating cash to build as the year progresses, consistent with the cadence of our business. Our outstanding debt was $565 million. During the quarter, we reduced our acquisition-related debt by $9 million and completed the refinancing of our $475 million note with a 3-year $500 million note. Before moving on to guidance, I'd like to announce that we are transitioning independent audit partners to BDO. BDO is the fifth ranked global accounting firm known for its expertise, innovation, and global reach. The move reflects our commitment to strengthening transparency, enhancing financial oversight and aligning with the best-in-class partners who can support our continued growth. Notably, we are the first in the cannabis industry to make this shift, setting a new benchmark for operational excellence and forward-thinking leadership. By partnering with a firm of BDO's caliber, we're positioning ourselves to navigate an increasingly complex business landscape with greater confidence and precision as we get closer to U.S. exchange uplisting. I want to extend my sincere thanks to our accounting team for their exceptional work in making this transition possible. This achievement is a direct result of their dedication, expertise, and tireless efforts. And I'd like to thank PKF for their support and partnership over the past 7 years. Now on to our outlook. While we are experiencing strong increases in traffic due to the many initiatives we have in place, we are closely watching the impact higher energy prices will have on our consumers' disposable income as inflationary pressures rise. Taking these macroeconomic factors into account and assuming current market conditions persist, we expect total revenue for the second quarter to increase 2% to 3% sequentially from the first quarter, which at the midpoint implies approximately $333 million. And with that, I'd like to turn the call over to the operator to open the line for questions. Operator: [Operator Instructions] Our first question today comes from Aaron Grey from Alliance Global Partners. Aaron Grey: Nice to see that growth continue on international. I know it's decelerated a bit from 2025. So first off, I would just love to hear in terms of your outlook for growth for international for 2026. And then second, for us, in terms of your prepared remarks for potential exports in the U.S. to international. Just any color you could give potentially on timing? And then as we think about whether or not the existing cultivation footprint would suffice or potentially you'd want to acquire just given the climate that your current cultivation is in and also the potential for the need for EU-GMP and GACP. Thank you. Boris Jordan: Thank you for that question. Let me first start with the international supply chain. As everyone knows, the international supply chain has been very difficult for everybody in the sector. A lot of cultivators aren't producing the type of flower that passes very strict EU-GMP regulations. And therefore, we have been looking both in Canada, mostly in Canada for increasing our own production, our own growing of product to ship to the international markets. However, this recent rescheduling, the language and the rescheduling really has given us pause because we can use our U.S. infrastructure. The timing of that, we don't know. It very explicitly says that we should be able to. Upon my return from Europe, I'm in Europe now, upon my return from Europe, I plan to spend some time in Washington meeting with the DEA as well as the DOJ to see what the timing could be. But because we're deemed once we submit our application, we were deemed rescheduled from Schedule I to Schedule III, in theory, we could start very quickly. We do need state cooperation as well. We need export permits from them. So there will be some time. So I really expect not to be able to do this probably until the end of the year, and we'll see at that point in time. Sorry, what was the first question that you had? Aaron Grey: Just outlook for international growth for 2026. Boris Jordan: Yes. International growth, I think we mentioned in the last call, we're looking at around 25% to 30% growth internationally this year, reduced down from over 50% last year due to no new markets. We expect that to accelerate significantly going into 2027. Operator: Our next question comes from Bill Kirk from ROTH. William Kirk: During the prepared remarks, Rahul gave transaction numbers for the quarter. I think he said plus 15% year-over-year, I believe, was how he said it. What is that on a same-store sales basis? And how has that number for the transaction growth year-over-year, how has it been trending the last couple of quarters? Boris Jordan: Rahul? Rahul Pinto: Sorry. From a same-store sales basis, we're not going to comment on that, but the trends are moving in the right direction in general. And we will be able to talk about that on the next cycle. But overall, as we look at transactions, they are moving up and they are eclipsing right now the price compression that we see in the marketplace. William Kirk: And then a separate kind of follow-up question. We've seen some comments today or some reported comments out of Senator Tim Scott about banking. I guess my question would be, how much of what we need to see or want to see from here requires some sort of congressional action versus things that can be done by the administration and the agencies who appear to be pretty well aligned. Boris Jordan: So I'll take that. I think that we knew that Senator Scott was going to say this as a matter of fact, I think last year on several of the various podcasts and things I did, I mentioned that Senator Scott had said that once we got rescheduling as Chairman of the Feds Committee, he would move SAFE banking. So we do expect him to do that. I think we'll probably see that in the third quarter, most likely. I don't think it will fit the agenda for the second quarter. And maybe we could even get a vote before the midterm elections. I don't know, but certainly, I think we could get a vote before year-end. It's a very popular issue. As you know, it's passed the House many, many times. I suspect that it will pass the Senate now. It seems to be more bipartisan today than it was under the previous Senate. The main person blocking it was Senator McConnell. As we know, Senator McConnell is retiring in 2027. So I do expect that SAFE Banking should be able to make it through. However, there is a chance also that we could get guidance from like the crypto industry did, guidance from FinCEN and from Secretary Bessent that would indicate that the banking industry could start to serve the sector. However, I believe that that will be good enough for certain institutions, but I believe other institutions will want to see some level of legislation because as we all know, one presidential administration to another could change the view. And so ramping up banking operations to then have to shut them down if the next President, for instance, had a different view or the next Attorney General or Finance Minister had a different view, Secretary. I think that they'll want to see -- certainly, money center banks, I believe, will want to see safe banking legislation go through before they get involved. But I do think a lot of other financial institutions, including credit card companies and midsized regional banks, I think, as well as, for instance, credit working capital facilities, things like that can open up with a simple guidance from FinCEN and the treasury. William Kirk: Congratulations, guys. Operator: Our next question comes from Kenric Tyghe from Canaccord Genuity. Kenric Tyghe: This is at least the second quarter I can recall where you've highlighted the lower price compression and better sort of domestic environment in terms of that price compression actually decreasing. Could you sort of speak to, one, how broad-based that lower promotional intensity is? And 2, Boris, the extent to which you think that, that hemp relief that you were calling out with alcohol retailers destocking and increased traffic into the regulated channel being a factor? Boris Jordan: I think there are several factors that are driving our comments on price compression. The first one is Curaleaf has substantially over the last year and 6 months that I've been CEO, increased the quality of our products. We've rationalized our product SKUs. We've increased the quality of our flower substantially. And so we've been able to start to increase prices ourselves because of that. And so we're seeing better margins, both in our wholesale business and our retail business based on our own product quality. The second thing I would say is there are certain markets in the U.S. I'll bring 2 as an example, Florida and Massachusetts that are starting to see stabilization in pricing, and we're not seeing the type of decline or maybe even any decline in those markets at this point in time. There are other markets, however, that are still compressing, but we are starting to see stabilization in certain markets. So overall, I would say that I'm getting a slightly better feeling that partially maybe because hemp products are starting to disappear even though we still have many hemp sellers still have until November. We definitely think that the supply chains are starting to break down. We think that there's less product availability. We think certain retailers are already starting to -- as they sell the inventory, they're not replenishing it. And so I think we are starting to see the only part of a recurrence in that. I don't believe that that will really hit until early 2027 when I do expect somewhere between 10% and 15% organic growth in the sector just based on the hemp shutdown. Operator: Our next question comes from Frederico Gomes from ATB Cormark Markets. Frederico Yokota Gomes: Congrats on the great quarter here, guys. Just a question, more big picture on rescheduling. Obviously, we got the medical portion, and we're probably going to get the recreational portion in the second half. And we know about the impact. But could you talk about the potential impact that rescheduling could have on sales, margins, the overall competitive environment, M&A? I mean, could it accelerate consolidation? Would it maybe let some companies that are struggling, survive for longer? What do you think are some of the puts and takes here in terms of a post rescheduling world in the industry? Boris Jordan: I think that it's too early to tell whether it will or won't have an impact on pricing. Let's be honest, most companies were not paying but accruing UTPs on their balance sheets. So I don't know yet whether we can talk about pricing changes in the marketplace at this point in time. I don't expect it to have a significant effect there. I do, however, think that it will have a significant effect on consolidation and M&A. We're already seeing a tremendous amount of tuck-in acquisitions across the countries. Many companies have not announced them yet. But I can tell you, we know of literally probably 10 to 15 transactions that have been done in the last 2 quarters regionally, maybe they're waiting for approvals or something. And I do also expect, as I've said earlier, I do expect to see larger consolidations between MSOs as well. This is a very much a velocity business. A lot of these companies compete literally across the street from each other with stores. We're seeing more transactions and we're seeing transactions increasing. And with the price compression that happened with hemp, we're seeing less capacity availability and less product availability in markets and shortages of products in the regulated market. And so by combining grow facilities, you're going to have massive cost savings and you're also going to have massive synergies to be able to provide the market with product and branding. And so I do think you're going to see -- it's a compelling story to see significant MSOs starting to merge on the back of 280E. I think you will see it because now you have certainty on the balance sheet. And so certainly, after we get the IRS guidance on 280E and we get hopefully the rescheduling of adult use in the second quarter, at that point in time, I do think that you're going to start seeing consolidation in the sector. Operator: Our next question comes from Russell Stanley from Beacon. Russell Stanley: Just around the scheduled hemp ban and efforts that start to interfere with the implementation date has so far fallen short. So I'd love to hear your confidence level that it will go into effect as scheduled. Do you see any risk to the date at this point? Boris Jordan: Listen, I think that, obviously, the hemp industry is doing everything they can. We raised quite a bit of money and they're lobbying very aggressively. And so this is politics and it's Washington and never say never. But at the moment, as we speak right now, I can tell you, I believe there's very little appetite within the House and Senate to change the rules that they set last year at this early stage. I do think, however, going forward, maybe a few years from now, I do think that you might get some changes, particularly around beverages, but I don't think you're going to get any changes here between now and November, no. Operator: Our next question comes from Pablo Zuanic from Zuanic & Associates. Pablo Zuanic: Two quick questions. One, in the past, Boris, you've talked about spinning off part of the international business. On the math you're giving of $1 billion, that's about 5, 6x sales. Your domestic business is staying around 2.5x. Is that still in the cards, especially with stocks, although they have moved up, stocks, they haven't moved up as much as we would have expected given all the good news. So if you can comment on that. And then the second question, which is somewhat related, I know we are all, including myself, very excited about the news flow and about the fact that the companies are registered with the DEA will become federally illegal supposedly, but the product will remain federally illegal, right? And will that create a problem as we move forward trying to implement a lot of these changes. When I say federally legal, Iowa, Kansas, Indiana is still illegal there, right, for medical even. So I'm just trying to reconcile one or the other, an illegal product and a federally illegal company. Boris Jordan: So the product -- medical product in those states where medical product is approved will be legal under federal law. And I believe many of the states will be passing medical cannabis legislation. We already know that at least 5 states that in the past have not even considered it that are ready now looking at passing medical cannabis legislation in those states. Some of the states you mentioned are part of that group that is looking at doing that. And so I do think that you'll have that. But under the CSA, you have to understand medical cannabis is going to be legal. So I want to stretch that point. Under -- are plans are international. We always have that option if we want to do it. Right now, we'd like to see what happens with the rescheduling that we'll use in the second quarter. Our business if you take a look at Curaleaf, in fact if you add in our European business, 80% if our business is medical. And so if you combine the U.S. and the European business, 80% of our revenues actually come from medical. However, the impact of 280E will only impact our U.S. business, which is 60% medical. And so we have a lot of options available to us if we decide. But at the moment, I'm assuming and hoping that as this legislation passes in the second quarter, I do think that at that point in time and as we get banking legislation, I do think at that point in time that you will have significant institutional interest in the sector. I have spoken to many large-scale investors, large long-only funds that manage trillions of dollars today, they cannot really look at this sector until they have one visibility into adult use, visibility into what effect that has on the balance sheet. And at that point in time, they need to start doing their research. They need to go to their compliance committees. So I believe that it will take 6 to 12 months post final rescheduling for large institutional players to start participating in the market. And if that's the case, I don't see a reason for us to have to split the business up. However, I will never say never because the European business is growing very, very aggressively. I do believe our margins as we start to vertically integrate that business are going to improve also quite dramatically, obviously, helping the overall margin of the business because Europe is starting to become a bigger part of our business. And so we will take a look at things at the time that we feel necessary. Right now, I feel pretty good about keeping the business together. Operator: And with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Camilo Lyon for closing remarks. Camilo Russi Lyon: Thank you, everyone, for joining us today. We look forward to speaking with you again in about 90 days. Have a great day. Operator: And with that, ladies and gentlemen, we'll be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Operator: Thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer, Inc. Third Quarter 2026 Earnings Call. With us today are Charles Liang, Founder, President and Chief Executive Officer; David Weigand, Chief Financial Officer; and Michael Staiger, Senior Vice President of Corporate Development. [Operator Instructions] I would now like to turn the conference over to Michael Staiger. Please go ahead. Michael Staiger: Good afternoon, and thank you for attending Super Micro's call to discuss financial results for third quarter fiscal 2026, which ended March 31, 2026. As you know, with me today are Charles Liang, Founder, Chairman and Chief Executive Officer; David Weigand, Chief Financial Officer. By now, you should have received a copy of the press release from the company that was distributed at the close of regular trading and is available on the company's website. As a reminder, during today's call, the company will refer to a presentation that is available to participants in the Investor Relations section of the company's website under the Events and Presentations tab. We've also published management's scripted commentary on our website. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation, future business outlook, including guidance for the fourth quarter of fiscal year 2026 and the full fiscal year 2026. These statements and other comments are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause actual results or even events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. You can learn more about these risks and uncertainties in the press release we issued earlier today, our most recent 10-K filing for fiscal '25 and other SEC filings. All of these documents are available on the IR page of Super Micro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation will refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the company presentation or to our press release published earlier today. The non-GAAP measures are presented as we believe that they provide investors with the means of evaluating and understanding how management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from as a substitute for or superior to financial measures prepared in accordance with U.S. GAAP. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts. Our fourth quarter fiscal 2026 quiet period begins at the close of business Friday, June 12, 2026. And for now, I will turn the call over to Charles. Charles Liang: Thank you, Michael, and thank you all for joining today's call. We had significant business value growth with our technology leadership and market expansion. However, before I discuss the specifics of the quarter, I want to provide an update on the recent development regarding the indictment of certain individuals formerly associated with the company. I must be clear, Super Micro is not a defendant nor a target or a grand jury investigation and Super Micro has zero tolerance to any employee who violated the federal law and regulation. I am personally shocked and saddened by this alleged action, which in no way represents the value or ethics of this company. We took immediate action by terminating our relationship with the defendants and are helping and cooperating fully with the U.S. government. Additionally, our independent directors have launched a thorough independent investigation with top forensic and legal firms to ensure we continue to maintain the highest standard of integrity. We are not waiting for this process to finish. We have further strengthened our global trade compliance program under expert leadership. Not only is Super Micro fully committed to protecting advanced American technology and following the highest and business standard, but continue to expand our manufacturing footprint right here in United States. Again, the alleged actions of a few individuals do not define us. Our focus remains on doing extraordinary work for our customer and partner and leading the industry with transparency and excellence. Now let's talk about the quarter. This was a quarter defined by value and focus for Super Micro. Despite the industry-wide shortage of key components, including CPU, GPU and memory, our business continues to grow and expand. Indeed, our back order is now in another record high. We advanced and optimized the orders data center infrastructure using our leading direct liquid cooling DLC technology. Our focus remains on delivering the fastest time to online, TTO, in the industry, ensuring our customers can scale their AI factories quickly and most efficiently. While our fiscal Q3 revenue of $10.2 billion was impacted by customer site readiness delay, our business fundamentals are stronger than ever. This is purely a short-term delay. Several customer sites were not yet equipped with the power and networking required for their cloud deployment, and we expect to capture this revenue in the coming quarters. One of the most significant achievements this quarter was our gross margin recovery, which increased significantly to 10.1% non-GAAP, representing a 58% improvement over the 6.4% non-GAAP reported in the previous quarter. We are committed to achieving a sustainable double-digit gross margin model by increasing our focus on enterprise market and our DCBBS business. Here are some key growth drivers. First, market strength. Business remains very strong in the NeoCloud, sovereign AI and Agent AI segment. We have been aggressively fostering the traditional enterprise and storage business for about 1 year, and we start to see strong growth -- growing opportunities. Our Data Center Building Block Solutions, DCBBS, continue to attract old and new customers' interest and create new profit streams. By offering a total data center solution that includes complete liquid cooling facility, management software, networking and service, we are providing much more value to our customers as they commit to our total solutions, product mix and efficiency. We improved our product mix with some more unique value products in this quarter and thereafter. We also advanced our design of manufacturing, DFM, and more automation in our factories to build products faster with higher yield rate and quality and supply chain. We successfully managed inventory through a dynamic supply environment and took actions to reduce tariff-related cost pressure. These efforts help improve our flexibility, protect margin and support the customer delivery time line. Here is the bigger story. Super Micro is evolving from a U.S.-based server designer and manufacturer into a total data center solution provider. We expand our business to help customer planning, building, deploying and servicing data center infrastructure for global enterprise and NeoCloud provider, especially. Our DCBBS business is essential to this transformation, providing almost everything a customer needs to build an AI factory, including cooling units, networking, power cell, battery backup, management software and many other data center subsystems. Our DCBBS business continues to grow exactly as what we plan, showing a consistent and accelerating contribution to our top line and bottom line quarter-over-quarter. And I believe our DCBBS will soon contribute more than 25% of our total profit in the coming few years. As an IT technology leader for more than 30 years, we have consistently turned industry disruption into innovation and new strong opportunities. One of the key value and drivers of our DCBBS business is our data center end-to-end management software. We see significant demand for the Super Micro data center and cloud software suite. including our SuperCloud Composer that manage tens of thousands of systems or racks in real time. It provides comprehensive control over system and rack level power usage, cooling status, safety condition and device utilization alongside many other critical features. Our management software feature also include advanced CPU and GPU workload orchestration, which is a critical function for today's AI data center. The revenue from this new software product line is finally growing at a tremendous pace, increasing from less than $10 million per quarter just a few quarters ago to $34 million last quarter, and more than $46 million booked for this quarter. By bundling subscription-based software and service alongside our hardware, we are strengthening our customer relationship and improving our long-term profitability. We expect DCBBS, including software and service to continue its rapid growth and to become a major part of our key value mechanism. We continue to grow and expand our partnership with many key suppliers. Especially with NVIDIA, we are currently shipping many SKUs of the latest rack scale systems, including GB300 NVL72, [ MNB-300 HGXQ ], B200 NVL4 and inferencing application optimized RTX product lines. And we are preparing to be among the first to market with the new Vera Rubin systems, including the NVL72 SuperCluster. We continue to build on strong momentum of our AMD MI350 platform as we prepare for the next generation of AMD Helios solutions, featuring EPYC Venice and MI400 series of products. In addition, we are working closely with Intel and Arm on the development of upcoming Xeon 6+ platforms and a new addition to our portfolio, including Arm AGI GPU-based solutions. This system will deliver exceptional performance per watt, specifically optimized for the growing demand of agentic AI workloads. By leveraging Super Micro's system building block solution right and data center scale building block architecture, we can efficiently support a wide variety of compute platform and optimize them for different business verticals. Moving on to our footprint. We are expanding our global production capacity with new facility to better support AI demand across the world. Our site in Taiwan, Malaysia and Netherlands are all ramping up aggressively. Domestically, we recently announced our largest U.S. site to date, a new DCBBS campus in Silicon Valley, just 1 mile away from our headquarter. This brings our total Bay Area footprint to nearly 4 million square feet, featuring 8 new buildings optimized for innovation, design, production and validation of our next-generation end-to-end data center total solutions. Within this new campus, we are building multiple large-scale validation and production facilities. Some of them including a clean room specifically to support our new DLC-2 subsystem and next-generation networking solutions, including advanced optical photonics-based device. With these expansions, we are on track to produce more than 6,000 of the world's most powerful [ AOR ] rack per month. In closing, Super Micro continue to scale our revenue and scale up value. We have strengthened our governance, delivering a meaningful margin recovery and expanded DCBBS growing in both volume and value through software, networking service and more. Our leadership in DLC technology pave our ability to deliver large-scale total solution at the industry's fastest time to online will continue to fuel our strong growth, keeping Super Micro at the center of our AI revolution. With that, I remain very bullish about our growth in the AI and data center market. For the fourth quarter, we target $12 billion, given stable supply conditions. For the full year, we target $40 billion. I will turn this over to David. David Weigand: Thank you, Charles. Fiscal Q3 FY '26 revenue was $10.2 billion, up 123% year-over-year and down 19% quarter-over-quarter. As Charles mentioned, the Q3 revenue was impacted by data center and customer readiness together with industry-wide supply chain constraints. We expect to recognize the deferred revenue in the upcoming quarters. Orders and backlog remains strong across our customer base, driven by AI infrastructure demand with AI GPU-related platforms contributing over 80% of revenue. During Q3, the enterprise channel revenue totaled $2.8 billion, representing about 28% of revenue versus 15% in the prior quarter. was up 46% year-over-year and up 45% quarter-over-quarter. The OEM appliance and large data center segment revenue was $7.4 billion, representing approximately 72% of Q3 revenue versus 85% in the last quarter. This was up 183% year-over-year and down 31% quarter-over-quarter. For Q3 FY '26, we had 2 existing customers, each representing more than 10% of revenues, one large data center customer at 27% of revenues and enterprise customer at 10% of revenues. By geography, the U.S. represented 69% of Q3 revenue; Asia, 13%; Europe, 7%; and Rest of World, 11%. On a year-over-year basis, U.S. revenue increased 154% Asia grew 1%, Europe grew 146% and the Rest of World increased nearly 500%. On a quarter-over-quarter basis, U.S. revenue decreased 36%, Asia increased 17%, Europe increased 105% and the rest of the world increased 392%. The Q3 non-GAAP gross margin was 10.1%, up from 6.4% in Q2. Gross margins were ahead of expectations, driven by our customer and product mix, together with lower tariffs, expedite and inventory reserve charges. Q3 GAAP operating expenses were $393 million, which was up 34% year-over-year and up 21% quarter-over-quarter. On a non-GAAP basis, operating expenses were $278 million, up 29% year-over-year and up 16% quarter-over-quarter. Both GAAP and non-GAAP operating expenses were up quarter-over-quarter due to higher headcount-related expenses. Non-GAAP operating margin was -- for Q3 was 7.3% compared to 4.5% in Q2. Other income and expense for Q3 totaled a net expense of $15 million, reflecting $49 million in interest and other income, offset by $64 million in interest expense related to convertible notes and the revolving credit facilities. The tax provision for Q3 was $127 million on a GAAP basis and $156 million on a non-GAAP basis, resulting in a GAAP tax rate of 20.8% and a non-GAAP tax rate of 21.1%. The Q3 GAAP diluted earnings per share was $0.72 compared to guidance of at least 52% -- $0.52 and non-GAAP diluted EPS was $0.84 versus guidance of at least $0.60 due to higher gross margins. The GAAP fully diluted share count decreased sequentially from 694 million in Q2 to 692 million in Q3, while the non-GAAP share count was largely flat at 709 million in Q3 compared to Q2. Cash flow used in operations for Q3 was $6.6 billion compared to $24 million used in the prior quarter. Operating cash flow was impacted by a reduction of $10 billion in accounts payable and by an increase in inventory of $581 million. These factors were only partially offset by higher net income and a reduction of $2.6 billion in accounts receivable. The Q3 closing inventory was $11.1 billion, up from $10.6 billion in Q2. CapEx for Q3 totaled $80 million, resulting in negative free cash flow of $6.7 billion for the quarter. At quarter end, our cash position totaled $1.3 billion. Furthermore, $2.7 billion of accounts receivable collections expected in March were received in early April. Our bank and convertible note debt was $8.8 billion, resulting in a net debt position of $7.5 billion compared to a net debt position of $787 million in the prior quarter. In addition to using our existing U.S. revolving credit facility and nonrecourse AR sale facility, we set up and commenced usage of a $1.8 billion Taiwan revolving credit facility to further support working capital requirements. Turning to the balance sheet and working capital metrics. The cash conversion cycle increased from 54 days in Q2 to 106 days in Q3. Days of inventory increased by 43 days to 106 days versus 63 days in the prior quarter. Days sales outstanding increased by 36 days to 85 days versus 49 days in Q2, while days payables outstanding increased by 27 days to 85 days versus 58 days in Q2. Now turning to the outlook for Q4 fiscal year '26, which ends June 30, 2026. We expect net sales in the range of $11 billion to $12.5 billion. We expect GAAP diluted net income per share of $0.53 to $0.67 and non-GAAP diluted net income per share of $0.65 to $0.79. We expect gross margins to be in the range of 8.2% to 8.4% based on expected customer mix. GAAP operating expenses are expected to be around $433 million, which include approximately $114 million in stock-based compensation expenses that are excluded from non-GAAP operating expenses. The outlook for Q4 of fiscal year 2026 fully diluted GAAP earnings per share includes approximately $95 million in expected stock-based compensation expenses, net of tax effects of $30 million, which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense, to result in a net expense of approximately $36 million. The company's projections for Q4 fiscal year '26 GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 19.4%, a non-GAAP tax rate of 20.4% and a fully diluted share count of 695 million shares for GAAP and 712 million shares for non-GAAP. Capital expenditures for Q4 are expected to be in the range of $30 million to $50 million. For the full fiscal year 2026, we expect net sales to be in the range of $38.9 billion to $40.4 billion. Michael, we're now ready for Q&A. Michael Staiger: Great. Before we begin Q&A, I just like to remind everyone that the purpose of this call is to discuss our third quarter fiscal '26 financial results. As such, we ask that you focus your questions on the results we announced today. Thank you in advance. And Christa, let's begin. Operator: [Operator Instructions] And your first question comes from Ananda Baruah with Loop Capital. Ananda Baruah: Congrats on the progress with the gross margin. It's great to see that. Yes. A couple, if I could. I guess the first one would be just on some of the stuff that's been sort of press released by you guys throughout the sort of during the quarter. I guess, specifically, could you give us an update on the indictment? Any more insight to any company employee involvement? Do you think you'll have to restate earnings? Are you on track to file your 10-Q, things like that? And then I guess, part and parcel with that, on the Board investigation that you guys announced, if you could talk to the opportunity that, that could have to strengthen the organization sort of -- and what those opportunities might be, that would be awesome. And then I have a quick follow-up. David Weigand: Okay. Thanks, Ananda. So the company was surprised and disappointed to learn of the alleged diversion to China of certain of our products. As we've previously announced, we're taking this matter seriously. The alleged conduct would violate our export control policies and procedures, and we're fully cooperating with the U.S. government to address this situation. In addition, our independent directors have retained an outside law firm, Munger, Tolles & Olson and a forensic firm, AlixPartners, to conduct an independent investigation into these events. The investigations are ongoing, and we can't give you any final information at this time. So based on what we know so far, though that could change as the investigation progresses, no one from the company other than those named in the DOJ indictment was involved. As to your second question on restatement of earnings, based on everything we know at this moment and considering the independent investigation is ongoing, we do not believe we will need to restate. And lastly, on the 10-Q, again, the independent investigation is ongoing and any filing will be subject to BDO review. But based on what we know at this moment, we are planning to file our 10-Q and are preparing accordingly. And I think your last comment about -- certainly, we will be taking to heart the results of the independent investigation, and we will look at that as an opportunity to grow and strengthen. Ananda Baruah: And I guess my follow-up would be sort of dovetailing off of that, you guys are probably aware sort of one of the top questions on investors' minds is in lieu of these sort of aforementioned dynamics, is there a potential for customers to get a little skittish and move away to other server vendors, Gen AI server vendors. So to the degree that you have any context that you could offer there, that would be greatly appreciated. And that's it for me. Charles Liang: Yes. Thank you for the question. Indeed, we are growing our customer base, like last few quarters I shared. Now we have many more large customers and midsized customers. And from our experience, work with customers, communicate with customers, most of the customers indeed feel pretty solid to continue our business and continue to grow together. So at this moment, I personally don't feel a negative feeling. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Manmohanpreet Singh: This is MP on behalf of Samik Chatterjee. For my first one, I just wanted to ask, in your last call, you mentioned DCBBS contributions to profits during first half of about 4%. Can you please update how did it track during the quarter? And how much of a driver was that relative to gross margin improvement that you saw during the quarter? And I have a follow-up. Charles Liang: Yes, a very good question. Yes, our DCBBS indeed continue to gain more and more traction from our old customer and new customer. So it's a very good value-add to our hardware and also enhancing our relationship with the customer. So the customer who use our DCBBS continue to grow. And we believe this growth will continue strongly. In next 2 years, I personally expect at least 20% of our net income will be from DCBBS, including the management software. Manmohanpreet Singh: Okay. And then for my follow-up, I just wanted to ask on capacity additions, which you've done during the quarter. Can you please help us quantify the revenue capacity that it helped to add for the company? Charles Liang: Yes. Also a very good question. Again, our capacity now is very huge, but we continue to grow our capacity because we like to make sure ourselves ready for a new generation of data center need for the industry. For example, a much higher density in power and computing density and also in photonics technology and new generation of switch. So we are preparing all of that. And some of the new facility indeed was paired with clean room. So to make sure we are able to provide exactly the best liquid cooling, the best communication bandwidth and minimize the power consumption for the new generation data center need. So although our capacity is already big, but we continue to build more capacity. Operator: Your next question comes from the line of Victor Chiu with Raymond James. W. Chiu: I just wanted to follow up on the first question that was asked. Does the investigation around the -- that may potentially impact your relationship with NVIDIA, subsequently, your allocation or supply of GPU and other components? Because I think that's another really frequent point of concern that we get from clients these days is how that impacts your relationship and whether or not that's -- the dynamic there has changed at all. Charles Liang: Our relationship with vendor have been very long time, right, including NVIDIA, AMD, Intel, Broadcom. So at this moment, we feel our partnership will stay strong and if not stronger, at least as strong as before. And we continue to work together for a lot of new projects. So we also share with our vendor is some -- a few employees' individual case. So I hope there are no impact basically. David, you want to add something to that? David Weigand: Yes. I mean our understanding is that there has been no change in allocation. W. Chiu: That's very helpful. And just a quick follow-up. The investments that you previously noted that you made in engineering support and services, have those mostly kind of peaked now? And is that contributing to the margin expansion at this point? David Weigand: I'm sorry, could you repeat that? W. Chiu: The investments that you've noted previously regarding engineering support services, have those kind of peaked now at this point? Or I guess, where are we along progress of those investments? And how is that contributing to the margin dynamics going forward? Charles Liang: Yes. I mean a very good question. Indeed, our service business, including data center planning, designing or deploying or other build-out services continue to grow. So we continue to grow that service team, consulting team and revenue continue to grow. Yes, in this segment, the profit is much better than our average hardware for sure. David Weigand: Yes. But I would say in no ways has peaked though. I mean it's really -- we're just gaining traction. Operator: Your next question comes from the line of Asiya Merchant with Citi. Asiya Merchant: If I could -- on just the supply constraints, there's been a lot of talk about CPU-based shortages. So just the guide that you're providing, are you constrained in any components here? And would there be a number if the supply issues were resolved? Basically, were you constrained by supply? And then if I can squeeze in one more as well on the data center. Clearly, you're seeing traction here. Relative to where you were last quarter when it was just starting to kick through, can you help us understand what kind of customers -- if you're seeing any change in the customers, whether it's from a vertical perspective or a geography perspective, where you're seeing traction with these Data Center Building Block Solutions? Charles Liang: Thank you. Yes, in terms of shortage, I believe it's a global common problem. So in the last 6 months, as you know, on the memory SSD price grow so much, double, triple, more than triple and some CPU shortage, especially from Intel. So -- and also even some GPU shortage, right? So we -- like other competitors, other system company, yes, we suffer a lot from those shortage. And those shortage may continue for -- we don't know how long, like memory and SSD. But we have a very good relationship with our vendors. So we continue to work with them and try to gain more long-term support. As to our customer base, yes, as what I shared last time, we start to gain more -- many more enterprise customer globally and NeoCloud. So we add more large customer and we add a lot of midsized and small-sized customers. And we will continue this direction to support more customers. Operator: Your next question comes from the line of Katherine Murphy with Goldman Sachs. Katherine Murphy: I was wondering if there was any onetime items that impacted gross margins in the quarter? And anything you could share there specifically to quantify? I think you mentioned tariffs, expedite fees and then inventory reserve charges. That would be helpful. And then I have a quick follow-up. David Weigand: Sure. So with the tariffs, as you know, were reduced by the Supreme Court. And there were some replacement tariffs that came in. So we are hopeful that tariffs will be down net on a net basis going forward. So whether I look at that as a temporary or ongoing thing is based on optimism. But the other thing regarding expedite fees, we had a very large deployment in our March quarter, which -- I'm sorry, in our December quarter, which ended up incurring a lot of expedite charges. So we -- those did not recur in the March quarter. So therefore, we expect that to be incrementally up going forward as to the supply constraints, as Charles mentioned, were -- it was especially troublesome in the last 6 months, but we expect some challenge going forward, but not like we incurred over the last 6 months. Katherine Murphy: That was very helpful. And then in terms of just thinking about the revenue miss in the quarter being related to a delivery that was delayed because of customer readiness, and that deal was contemplated in your prior guidance for a margin benefit that was modest quarter-over-quarter. Was that deal that flipped or was otherwise delayed a drag on consolidated gross margins? And how should we think about the impact to margins as the revenue from that deal gets recognized in the coming quarters here? David Weigand: Yes. So we think that some of the large deals that we talked about in the past have been incrementally beneficial to Super Micro because of our reputation, the reputation that it brings for us in deploying large-scale installations to some of the best sites in the world. And so what we noticed now is that we're -- as Charles mentioned, we're not only getting more -- larger engagements, which gives us a diversified customer base, but we're also getting better margins from those sales. And so we're actually -- we actually had more diversification this quarter, and we see that going into the current -- into the June quarter as well. So we think on a net basis, some of the strategic decisions that we made on large installations have been beneficial. Operator: Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: I've got 2. The first one is a clarification on revenues and gross margins. David, you mentioned that there was some pushout of revenue into future quarters. Can you help us quantify how much of that is coming back in, in the December quarter versus how much will be in future quarters? And on the margin side, can you help us clarify how you're thinking about the margin decline from fiscal 3Q to fiscal 4Q? I think you guided 8.3% gross margin on higher $11.8 billion of revenue. So what are some of the factors impacting gross margins between fiscal 3Q and 4Q? And I have a follow-up. David Weigand: Sure. So regarding the deferred revenue, it really comes down to when the customers are ready and when their data centers are ready, Ruplu. So we're always optimistic that we can ship right away, but that sometimes depends on the customer readiness. So we have to wait and see if -- how much lands in the June quarter and how much lands in the September quarter. As to margins, the -- our margin mix is determined by which customers that we sell to and which products we sell. So that's really the biggest dynamic in affecting our margins. But what we -- so therefore, what we see is a good upward trend to that 8.2% to 8.4% range, and -- but it will depend on which customers ultimately we sell to. Ruplu Bhattacharya: Got it. Can I ask a follow-up on working capital? In the past, when we've had GPU transitions, you've had to spend some working capital and time and money as customers qualify these new racks. So I'm thinking as NVIDIA releases new GPUs and when the transition happens from the overall rack to a new fiber rack, do you -- how are you thinking about your working capital needs? And is there a chance that you might have to come to the capital markets again to raise capital for working capital? So just your thoughts on investments required as new GPUs and new rack designs come out. Charles Liang: Yes. Very good question. Basically, we are diversifying our customer base and also improving our product value. Now we have more and more partnership that we not just build the AI server, not just the storage, but we have customer deployment and build a whole data center with DCBBS total solution. So indeed, our business will be more diversified and more kind of smooth ride in terms of revenue dynamic and also profit margin change. So in terms of those concerns, we are improving in a very positive direction now quarter after quarter, basically. Ruplu Bhattacharya: Okay. And in terms of working capital, David, any thoughts there? David Weigand: Yes. So Ruplu, what I would say is I always hope that we need to go back to the markets for more money because... Charles Liang: If we grow a lot. But if we grow more steadily, our capital should be pretty enough. So it depends. David Weigand: It depends on how fast our growth rate is, Ruplu. Charles Liang: Yes. If we try to double again revenue, then we may need some more help in terms of capital. But if we grow a little bit humble, then I believe we are pretty enough because now our business model is improving. Operator: Your next question comes from the line of Nehal Chokshi with Northland Capital Markets. Nehal Chokshi: Congratulations on the strong gross margin. Charles, you mentioned that over the next 2 years, targeting 20% to Data Center Building Block Solutions, 20%. Was that gross profit? Or was that revenue? Charles Liang: Profit. Nehal Chokshi: Okay. Very good. And I can't remember, David or Charles, you gave a percentage or a dollar number of DCBBS in the quarter and the quarter ago period. Can you just repeat that again real quickly? David Weigand: We didn't give that percentage out, Nehal. But our gross margin did increase on our data center sales, but I don't have the percentage of our gross profit that, that represented. Charles Liang: Yes. When the DCBBS percentage continue to grow, we may quickly provide that kind of percentage change. Nehal Chokshi: Okay. And so thinking about the significant improvement in gross margin, would you bucket that more towards DCBBS ramp or more towards a reduction in your 10% customer going from 63% to 27% in that -- from the December to March quarter? Charles Liang: Yes. I guess there are 2 factors. We will continue to improve our gross margin. One is DCBBS solution. With that segment, our profit margin most of the time are more than 20%. And the other segment is the enterprise customer focus. We start to grow many more enterprise customer, and we will continue that direction. So that will improve our gross margin and net margin as well. Nehal Chokshi: Okay. And then included in the guidance is the expectation that this customer that was 27% of revenue in the current quarter will continue to be a 10-plus percent customer? Charles Liang: Yes, we will have many more NeoCloud kind of midsized cloud customer and even small-sized cloud customer. And for sure, we will continue to support a large cloud customer as well. But more NeoCloud, small cloud, enterprise cloud. So overall, our margin will continue to improve. Operator: Your next question comes from the line of Quinn Bolton with Needham & Company. Neil Young: This is Neil Young on for Quinn Bolton. So I was hoping you could touch on maybe what drove -- you did a little bit, but maybe touch on what drove the strong quarter-over-quarter increase in enterprise. And then are you expecting to see healthy growth from enterprise again here in the next quarter and through fiscal year '27? Or should we think about the revenue split by channel more closely reflected in 2Q? And then I have a follow-up. Charles Liang: Yes. We don't provide the detail, but the direction is there very strongly. I mean improve many more enterprise customer, and we see a lot of customers really like to work with us. And then at the same time, DCBBS help us to engage with more and more new cloud and enterprise AI data center customer. So long term, we feel pretty comfortable in this direction. Neil Young: Okay. That's helpful. And then I just wanted to go back to gross margin one last time. Can you help us think about sort of what level is sustainable as we do look into fiscal year '27 as it seems like large AI deployments will most likely trend towards being a bigger mix of revenue in the coming quarters? Charles Liang: Yes. We believe we will continue to grow in a very healthy way because we are growing customer base, we are growing our product line. We are growing total solution, including software and service. So we are getting to a much mature, much high-value partner to the market. Operator: Your next question comes from the line of John Tanwanteng with CJS Securities. Jonathan Tanwanteng: Really nice quarter. I was wondering if you could just address a little bit more on the export violation issue and if that might impact your ability to finance growth or the cost to finance growth going forward. And I don't know if you talked about the cost of remediation or addressing the violations and preventing them from happening again. But if you could help disclose that, that would be helpful as well. David Weigand: Yes, John, I think I'll go back to the comments that I made earlier that we -- the company was not named in this. And so therefore, we take these things very seriously. But we -- and we're conducting our own internal investigation, as you know. And I don't want to add any more to that. Charles Liang: And also kind of based on what we know so far, though there could be a change as the investigation progresses, no one from the company other than those named in the DOJ indictment was involved. So we have a very good confidence with our integrity. Jonathan Tanwanteng: Perfect. And then I have a follow-up, if I could. You mentioned record backlog and strong orders. And I was wondering what that indicates heading into the back half of this calendar year. Just from a growth perspective, number one; and number two, if the supply environment can support growth over the first half? Charles Liang: Yes. Basically, we are a faster-growing company, as you know. So we can grow much faster if we accept lower margin business. So we try to be balanced in between the growth and the gross margin and net margin. So basically, we are in good shape. I would like to say we can control and decide the ratio of the balance. Operator: Your final question comes from the line of Mark Newman with Bernstein. Mark Newman: Congrats on the gross margin. On the gross margin and the mix, it sounds like that the gross margin rebound is driven partly by some of these, what you call expedition charges reducing. But also it sounds like, if I get it right, the enterprise mix is also helping. I wanted to ask just to clarify if that's right. And within enterprise, is that AI server? Or is this more traditional server? I have another question also on the revenue as well. Charles Liang: Indeed, both. Kind of for AI enterprise, I mean, a lot of gen AI kind of inferencing application. So we see a very strong demand there. And for traditional server and storage, even IoT, we also start to greatly support and expand this market, and we see a very good progress. So we will continue overall enterprise business. Mark Newman: Okay. Great. And then on the revenue, it sounds like the reason for the slightly light revenue was this 63% customer last quarter now pushed out a little bit, which is, I believe, the 27% customer. As that customer comes back, presumably, if that customer rebounds a little bit because some of that revenue has been pushed out, is that not going to be a bit of a drag down on the margins in the coming quarters? And also just one more quick question. You mentioned record backlog. Any clarity on that? I didn't hear any actual numbers on what the backlog is and how that's changed over time. David Weigand: Yes. So we don't give out our backlog number. So we just make general comments about the fact that it's very strong. But we are -- as I mentioned earlier, we've diversified our pipeline extensively. And so we have -- as Charles mentioned, we have a number of large deals from new NeoClouds and Cloud Service Providers, which we are expecting to increase both our footprint, our customer diversity as well as our margins, along with our DCBBS and enterprise expansion. Operator: Thank you. Ladies and gentlemen, that does conclude today's conference call. Thank you all for your participation, and you may now disconnect.
Operator: Greetings, and welcome to the American Coastal Insurance Corporation's First Quarter 2026 Earnings Conference Call and webcast. [Operator Instructions] As a reminder, that this conference is being recorded. It is now my pleasure to turn the call over to your host, Jeremy Hellman, Vice President at the Equity Group and American Coastal Insurance Corporation. Thank you. Jeremy Hellman: Thank you, operator, and good afternoon, everyone. American Coastal Insurance Corporation has also made this broadcast available on its website at www.amcoastal.com. A replay will be available for approximately 30 days following the call. Additionally, you can find copies of the latest earnings release and presentation in the Investors section of the company's website. Speaking today will be President and Chief Executive Officer, Bennett Bradford Martz; and Chief Financial Officer, Svetlana Castle. On behalf of the company, I'd like to note that statements made during this call that are not historical facts are forward-looking statements. The company believes these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those expressed in or implied by the forward-looking statements. Factors that could cause actual results to differ materially may be found in the company's filings with the U.S. Securities and Exchange Commission in the Risk Factors section in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Forward-looking statements speak only as of the date on which they are made, and except as required by applicable law, the company undertakes no obligation to update or revise any forward-looking statements. With that, it's my pleasure to turn the call over to Brad Martz. Brad? B. Martz: Thank you, and welcome, everyone. During the first quarter of 2026, American Coastal continued to be patient and disciplined in navigating a rapidly softening commercial property insurance market. Most of our risk portfolio continues to produce exceptional results, evidenced by our fantastic loss and combined ratios. Average account rate decreases are distorting comparability with gross premiums, but premium production only tells part of the story. Looking deeper reveals American Coastal's account retention was in line with our targets and our policy count and exposure base actually increased at the end of the current quarter versus the same period a year ago. This is strong evidence that ACIC continues to protect and defend its market leadership position. The key to ACIC's long-term success has been our ability to maintain an adequate margin throughout the cycle. Having a strong underlying combined ratio is what ultimately enables us to retain catastrophe risk and produce an acceptable risk-adjusted return on capital over time. Thus, despite losing rate on the front end, we are maintaining margin because loss costs and reinsurance costs are also moving the right direction. I'm pleased to report that our June 1st, 2026, core catastrophe reinsurance program is effectively complete, and we are very pleased with the outcome. The key takeaways are: first, we were able to secure risk-adjusted reinsurance cost decreases that were necessary for us to remain both very competitive and profitable. Second, we increased our exhaustion point up to over $1.6 billion, expected to exceed the 250-year return time using the most recent version of Verisk hurricane model, including demand surge and a 10% load for loss adjustment expenses. Third, we have moved our lower layers to an all-perils basis that will allow us to non-renew the January 1st all other perils catastrophe reinsurance program next year, while maintaining robust protection against potential non-hurricane cat events. And lastly, we have more aggregate protection against frequency and severity resulting from a potentially active hurricane season. Pages 11, 12 and 13 of our earnings presentation provide some additional information regarding our reinsurance program renewals. For the core cat in particular, American Coastal is still evaluating various retention options, and that is expected to be completed very soon. Once finalized, we will disclose more details regarding our hurricane retentions as well as the expected total cost of the [ 6/1 renewal ]. I want to personally thank our reinsurance partners for their incredible support and thoughtfulness as we keep moving forward together. I'd like to now turn it over to our CFO, Lana Castle, for more specifics on our financial results. Svetlana Castle: Thank you, Brad, and hello. I'll provide the financial update, but encourage everyone to review the company's press release, earnings and investor presentation and Form 10-Q for more information regarding our performance. As reflected on Page 5 of the earnings presentation, American Coastal demonstrated another strong quarter with net income of $19.3 million. Core income was $19.3 million, a decrease of $1.4 million year-over-year due to decreased net premium earned, partially offset by decreased total expenses. Our combined ratio was 66%, an increase of 1 point from 2025 and in line with our previously stated target. Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development, was 68.3% compared to 68.2% in the prior year. We continue to demonstrate underwriting discipline through the market cycle as indicated by our stable margin. As shown on Page 6 of our presentation, revenues and expenses remained consistent year-over-year. Other income decreased $900,000 in the current year, driven by nonrecurring items in 2025. Net income from continuing operations remained relatively flat, decreasing $400,000 in the current year, inclusive of this nonrecurring income. Page 7 shows balance sheet highlights. Cash and investments decreased 7.5% from year-end to $599.4 million, driven by the payment of our previously declared special dividend of $0.75 per share of $36.6 million. The company's liquidity position remains strong. Stockholders' equity increased 4.5% to $331.7 million, driven by our underwriting results. Book value per share is $6.86, a 5.4% increase from year-end 2025. The company is well positioned to navigate the shifting market and capitalize on opportunities as they present themselves. I will now turn it over to Brad Martz for closing remarks. B. Martz: Thank you, Lana. Today, we estimate we have between $150 million and $200 million of excess capital in our company. That provides us with tremendous strategic and financial flexibility moving forward. Margins remain solid. We are obviously losing some premium on the front end, but with earnings -- pretax earnings essentially being flat year-over-year and maintaining a strong combined ratio, we feel like that is representative of the disciplined underwriting we continue to do here at American Coastal. That concludes our prepared remarks for today, and we are happy to field any questions at this time. Operator: [Operator Instructions] And our first question comes from Michael Phillips with Oppenheimer & Company. Michael Phillips: Maybe a first couple of questions, Brad, around just the impact, I guess, for modeling purposes of the new reinsurance. How should we think -- I mean, a lot of moving parts here, right? So how should we think about, I guess, on a consolidated basis, maybe either just the net to direct, net to gross premiums this year and maybe even next year, maybe more so this year as compared to what it was in 2025? B. Martz: Thanks for your question. We appreciate that. I would prefer to defer that question until we finalized our ultimate retention decisions only because I think that has an impact on ceded premiums as well as how to model losses in the second half of the year. We are very close. We're hoping to have that finalized before today's call. But while the program in excess of $50 million is essentially done, we are looking at various cost benefit analyses of reducing likely second and third event retentions to ensure that we are remaining profitable in a 3 loss scenario. That has been one of our primary goals to make sure we can maintain underwriting profitability even with 3 full retention events in Florida. So I think it's probably a little early, but we can still suggest and refer you to the full year guidance that remains unchanged at this time. I think that is the best estimates we can provide at this moment. After the second quarter, it is possible we'll want to revisit that guidance, but not at this time. Michael Phillips: Okay. I guess maybe I was going to ask this later, but since you mentioned it, so the first quarter results so far don't give any reason to change the revenue guidance that you gave earlier? B. Martz: No. Second quarter is our strongest premium production quarter of the year. It has the potential to essentially make or break that guidance. So I want to be cautious in potentially using the first 3 months of the year to revise our estimate for the full year. But for right now, we're still striving for those estimates on a full year basis, but it will depend on how strong the second quarter is. Michael Phillips: Okay. That makes sense. Thanks, Brad. Can you just, I guess, remind, where you see the opportunities for the E&S carrier? I think it's mainly just if I'm right here, Texas and Florida for now. Is that right? And then kind of longer term, just thoughts on how you see that expanding? B. Martz: Yes, absolutely. We finally assumed some E&S business in the first quarter. It was about $6.2 million of E&S premium that came in through our participation on the AmRisc's E&S portfolio, which we were excited about. That does still track with our initial full year guidance, although anything could happen, it could certainly come in above that or below that. Where we're seeing opportunities for Skyway is really going to be dependent on market conditions, but we're evaluating all classes of commercial property very, very carefully. Our core products in both condominiums, apartments and assisted living facilities are where we're going to lead. And we're going to continue to focus on properties with risk characteristics that are very similar to our portfolio in Florida. So -- we are also working with various fronting partners to stand up a fronted A.M. Best-rated option for use in Florida and outside of Florida for Skyway to have additional underwriting capacity that will likely produce some premium by the fourth quarter, but we're still in the process of setting that up. Hope to have it operational in the third quarter with the premium production starting in the fourth quarter. So not a huge uplift from E&S via Skyway underwriters in 2026. It's more of a 2027 initiative. I think most of our E&S premium, somewhere between $50 million and $80 million is going to be coming from the assumption of -- and co-participation on the AmRisc's portfolio for 2026. Michael Phillips: Yes. Perfect. That's very helpful. And then maybe just lastly on the loss or expense side. Your G&A expense kind of averages around $10 million or $11 million a quarter. Any reason to think that could change any time over the next year or so in either direction? B. Martz: No, it's been relatively stable. Obviously, we had some nonrecurring benefits in the prior year that are distorting the expense ratio in the current period. But as far as our fixed costs, we've got a very good handle on those. And have a strategy to continue to try and do more with less. We're gaining some operating efficiencies through various uses of technology and AI tools, which we're super excited about. It's very premature to actually get into any real details, but our mantra -- one of our strategic objectives for this year was to operationalize AI, and we're off to a very good start. Operator: Your next question comes from Mitchell Rubin with Raymond James. Mitchell Rubin: We've heard some market rhetoric around increasing competition in Florida. Can you provide some color on the trends you're seeing with retention levels on renewals and new business? B. Martz: Yes. Retention historically in our business, Mitch, has been between 75% and 95%. That's where we target account retention with kind of the sweet spot being in the low to mid-80s. It was slightly below that in the first quarter, but well within our targeted range. We saw it bounce back pretty nicely in March after we made a voluntary decision to walk away from a few large -- very large accounts in January, where we did see some what I would consider to be reckless competition come in and significantly undercut both on price and on deductible, which was just not consistent with how we underwrite. So we're going to be disciplined in those situations and cede market share to those willing to burn their way into the market. It's rare that that's happening. It's not a daily occurrence. I would say competition and capacity is obviously robust, but most of that is healthy competition, and we're doing a good job of defending our market leadership position as evidenced by the fact that our policy count and our exposure base is relatively stable. So it is tough flooding out there, no question about it. But we feel very good about our ability to compete moving forward given the job we've done on the reinsurance renewal. We're -- the risk-adjusted cost decreases there, and again, I'm going to refrain from giving specific numbers today. But right now, they are exceeding our average year-over-year average premium changes. So with reinsurance costs in line or better than what we're losing on the front end with our rates, it will continue to allow us to compete very aggressively and maintain our best accounts. Mitchell Rubin: That's very helpful. Sticking with the reinsurance renewal, can you walk us through some of the more meaningful structural changes in the renewal relative to last year's program? B. Martz: Yes, I'll reiterate them again for you in case of you want to dive into more details, just stop me and let me know. But we have more overall limit. That's number one. Introducing some new cascading layers that work like a top and drop where it's -- you've got a lot more vertical limit for first event, yet more aggregate limit for second and subsequent events, assuming those layers are not eroded. So the increased protection for both frequency and severity is sending return times even higher year-over-year. So we feel very good about it, whether you're looking at it from a first event, a second or a third event perspective. So more robust coverage at a very attractive risk-adjusted rate decrease combined with, I guess, the third biggest change is the movement to an all-perils tower away from a hurricane-only tower. Historically, we had separated the non-hurricane and the hurricane risk because of the noise and the volatility associated with our old discontinued personal lines business. But we just have exceptional loss experience when it comes to the SCS, severe convective storm stuff. So it made perfect sense for us to think about including the lower layers, placing the lower layers on an all-perils basis. And that way, we will -- that would save us approximately $4 million by nonrenewing the layers excess of $50 million on the AOP cat renewal at [ 1/1 ]. And then we'll certainly obviously consider various options within our retention with that renewal because there's still some additional spend there. In total, that program was about $11 million, if I remember correctly. So there's still significant spend there to manage the potential frequency and severity of non-hurricane cat. But we're trying to drive simplicity and standardization across the board with this risk transfer approach. And we got a lot more overall limit out of our gross cat quota share as well. So while we're maintaining the 15% cession rate with earned premiums going down in this part of the cycle, we are actually technically shrinking that reinsurance spend via the quota share. So we view that as a positive, and we're very happy with where we landed this year.. Operator: Your next question comes from Bill Dezellem with Tieton Capital. William Dezellem: Would you please go into a bit more detail on the new initiatives that you're doing on E&S front and the timing on when that may lead to total American Coastal growth? B. Martz: Sure. Bill, reiterating timing, obviously, we got E&S kickoff in the month of March with the initial $6.2 million of written full year is still, like I said, somewhere going -- it's going to depend on how much capacity AmRisc can put to work, right? We've given them a certain amount of capacity. They're fighting hard to win and write quality business. And I would expect that number is going to add about $70 million in E&S premium to our company this year that we did not have last year. That's solid new growth coming from that segment. Beyond -- for '27 and beyond, I think it's going to look very similar to what we've done with apartments, where you could expect $20 million to $30 million annually of new business through a thoughtful sort of very disciplined approach to finding niches, where we know how to compete. We know how we're going to win and we can earn an attractive return on capital. Some of that is obviously market dependent and what's going on with terms and conditions for sure. If market changes, maybe we can do a lot more, a lot faster. But given current market conditions and our outlook for where markets are headed, especially if this is a relatively benign hurricane season, which is forecast given the current prediction for a super El Nino year, it could be slower for us to attract and write new business. William Dezellem: May be the first time that I've ever heard a quasi-plea for more hurricanes. B. Martz: I wouldn't go that far. We don't wish that on anybody. But yes, I mean, it certainly would chase off some of the capacity that's out there doing irresponsible things and maybe firm up pricing a little bit, which would give us some more comfort and margin for error as we branch into new territories with our core products. We're very confident in our ability to compete both in and outside of Florida, but -- and we have underwriting experience in places like Texas and South Carolina with commercial residential. We've been there before. We've got a good game plan, but sometimes you just got to be patient with the insurance cycle. William Dezellem: Thanks, Brad. All joking aside, so I want to make sure I'm getting an apples-to-apples comparison here. This quarter, you had $65 million of net earned premiums. So when you're talking about the $70 million of E&S premium with AmRisc this year, that would essentially be equivalent to that [ number or set ] [Audio Gap] to add quarter, the equivalent of one additional quarter to your business revenue? B. Martz: Not quite. Not quite because I was mixing and matching written and earned a little bit here. So I was talking about written with the $70 million target currently. And again, which could go up, which could go down, but that's written on an earned basis, I would expect about half of that to earn this year.. William Dezellem: Thank you for the clarification. Very good point. And assuming that you had 100% retention for additional new business next year, both of which are faulty assumptions. But if that were the case, statement would hold for 2027, that would essentially be the equivalent of an additional quarter. B. Martz: I think that's fair. And I do think, again, with current assumption of continued soft market conditions, we can expect reinsurance costs to be ultimately very competitive. We still have tools in our arsenal to manage the ceded premium that would potentially allow for even more growth on a net premium earned basis after reinsurance spend. So depending on our risk appetite and what's going on with the cost of reinsurance capital, I do think the outlook gets even better given some of those elements that are within our control. So we'll have to wait and see. But yes, ideally, we'd like to be growing revenues and earnings. at all times. That's ideal, but that's just not something -- we're not going to be focused on growing top line in a market that -- where you won't like the results if we do it. William Dezellem: No, that's -- I really appreciate both that and the perspective how those premiums are ultimately flowing in and the implications that could have. Operator: And your next question comes from [ Akshay Fellow ], Private Investor. Unknown Attendee: I had a question on capital allocation. You mentioned $200 million of -- $200 million of excess capital and we only see about $5 million of stock repurchases in Q1. And I understand there's probably an additional $20 million of repurchases authorized that could be done. Can you please expand on the reasoning for -- reasoning behind only doing $5 million of stock repurchases [ with $200 million of excess capital ]. B. Martz: Yes. Thanks for your question. It's a good one. We certainly have excess capital in the system between our statutory ordinary dividend capacity, the amount of equity and capital we've amassed in our captives as well as the unregulated unrestricted cash we have on hand. We're being a little cautious about share repurchase, primarily because of the fact that it would further reduce the outstanding float, which -- and the liquidity in our stock. So I think that's one we really would prefer to maintain for severe potential dislocation in the price. The stock is still very cheap and by almost any measure. So it is attractive to us. And we could see some additional use of that Board authorization in the second half of the year. I definitely don't want to rule that out, but we also have to be in an open trading window. Open -- the window for us has been closed and is generally closed half of every quarter. So there's that constraint as well. But I think share buybacks are definitely on the table for discussion as is debt reduction and special dividends to shareholders. So a lot of that will depend on timing, what's going on with interest rates, what happens with our results for the full year. So we'll be mindful and watch the stock price. If it gets too cheap, that's something we will give serious consideration to. Unknown Attendee: Just to kind of like comment on that like looking at where the share price is trading, it's kind of like a chicken or the egg problem. Once you have -- once the market gets clarity on the next card market or rates increasing or the actual growth trajectory of the company, the prices tend to go up and then doing buybacks during those times, it just increases the cost of capital, whereas now we have uncertainty on the rates and then the share price for that reason is trading or one of the reasons why it's trading where it is, so that you have the best opportunity by doing these terms. And like it's a balance, I'm sure that you understand. Yes. So just wanted to kind of comment on that, but thank you for your time. B. Martz: Yes. All fair points. Operator: Thank you. And ladies and gentlemen, that was our last question for today. So with that, we will conclude today's call and all parties may disconnect. Thank you, and have a good day.